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

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, we believe New Look will create significant value that will be reflected in its share price as well as generate significant interest from one of the giants who are consolidating the global industry. Buy rating and target price of $24.00.

Seeing is Believing – Demographics Driving Global Growth in Eyewear

The industrialized world is aging rapidly. It is common knowledge that as we age, we are more susceptible to disease as our bodies break down. The statistics pertaining to health care costs by age group bear out this reality.

Average annual health care expenditures by age, 2005

Source: The Sloan Center, Boston College

From the data, it is clear that age 40 is the demarcation line at which health care costs start noticeably appreciating. Note that from ages 25-29 to 30-34 and then to 35-39, costs accelerated by 14% and 11% respectively. However, starting at ages 40-44, costs grew by 29%, eventually further doubling between 40-44 and the 60-64 age group. Coincidently, the median age of most of the industrialized countries is now over 40 and, in a lot of cases, materially so. Logically, therefore, healthcare costs are about to skyrocket in industrialized nations. Median Ages of Selected Countries Country Median Age 5-years Ago % Change

Canada 40.7 33.0 23% Japan 45.0 37.0 22% Italy 44.3 37.0 20% Austria 42.6 36.0 18% Germany 43.7 38.0 15% France 39.7 35.0 13% UK 40.5 36.0 13% USA 37.1 33.0 12% Source: CIA, The World Fact Book

This is certainly not a new revelation. What may be new, however, is thinking about eyewear as part of that rising health care costs. While

above we noted that age 40 marked the demarcation line after which per capita health care costs begin to escalate, age 40 also marks the time when vision starts to deteriorate. Presbyopia, from the Greek for “old eyes” is defined as a condition where the eye exhibits a progressively diminished ability to focus on near objects. According to the American Optometric Association:

“Presbyopia usually becomes noticeable in the early to mid-40s. Presbyopia is a natural part of the aging process of the eye. It is not a disease, and it cannot be prevented.”

To exemplify the magnitude of the need for eyewear as we age, according to the Eyecare Trust in the United Kingdom (a registered charity whose purpose is to raise awareness in all aspects of eye health), 96% of that country’s population aged 55 and over wear glasses. Extrapolated over all of the countries of the industrialized world, eyewear is indeed a huge market.

Assumed Eyewear Market in Industrialized World Region Population (mln) Median Age Pop. Needing Glasses* North America 351 37.5 193 Western Europe 400 42.0 240 Japan & S. Korea 178 13.0 107 Total 929 34.7 540 * Assumes 55% of population in N.A, and 60% in Europe, Japan & Korea Source: CIA, The World Fact Book and Beacon Securities Ltd

As these populations continue to age (as per the table above which shows that median ages are up between 4 and 8 years just over the last 5 years!), we believe the percentage of the population that need glasses will continue to increase.

Nevertheless, we can now attempt to determine how large a market this is in the “First World”. We have assumed that once one reaches age 40, she/he needs glasses. Therefore, the total amount of years wearing glasses is life expectancy minus 40 years. Given it is advised that patients update their prescriptions every 3 years and that one needs two pairs of glasses (including sunglasses), we assume one will buy 26 pairs of glasses over his lifetime. Assuming a purchase price of $225 per pair (including an eye exam), we arrive at a market of $3.2 trillion over the next 40 years. Amortized over 40 years, this amounts to a market opportunity within the industrialized world of $80 billion per year.

Market Opportunity in Industrialized World Over The Next 40 Years Pop. Needing Life Yrs Wearing Renewal Avg Region Pairs Total Market (mln) Glasses (mln) Expectancy Glasses Rate Price North America 193 79.0 39.0 3 2 $225 $1,129,343 Western Europe 240 80.0 40.0 3 2 $225 $1,440,000 Japan & S. Korea 107 82.0 42.0 3 2 $225 $672,840 Total 540 $3,242,183 Source: World Bank and Beacon Securities Ltd

Not an Easy Model to Replicate on the Internet

As opposed to many other consumer products, the business model of selling glasses through “brick and mortar” outlets is not one that is easily replicated over the Internet. This is primarily because only licensed professionals can write prescriptions and then subsequently, the glasses must be fitted properly to the patient’s face. In this latter phase, fashion also plays an important role as patients will typically try on multiple frames to see what best suits his/her face. As pertains specifically to Canada, according to the Canadian Association of Optometrists, prescription eyeglasses are classified and regulated as medical devices by Health Canada. As such, they can only be dispensed by licensed professionals, such as an optometrist or an optician (thereby making sales over the Internet technically illegal, except in British Columbia since 2010). There are 3 specific professions within the eye care industry, whose roles are delineated as follows and who are regulated at the provincial level:

a) Ophthalmologist: Medically trained doctors, they are specialists trained in ocular disease management and eye surgery. Ophthalmologists may refer patients to optometrists for optical aids, vision therapy, specialty contact lens fittings or low vision rehabilitation. b) Optometrist: An eye care professional concerned with vision, eye health and function of vision pathways. Post high school, an optometrist has 8 years of total education. Optometrists may refer a patient to an ophthalmologist for further assessment, treatment and surgery or ocular diseases. c) Optician: A specialized practitioner who designs, fits and dispenses lenses for the correction of a person’s vision. An optician uses a prescription from an ophthalmologist or optometrist to do so.

Given the regulations concerning prescriptions, the need to properly fit the frame to one’s face and the inherent fashion nature of the purchase, we believe “brick and mortar” retail sites will continue to garner the lion’s share of the market. Given the limitations of the Internet on all of those counts, we believe the Internet will primarily be a force in contact lenses and low-end frames. Interestingly, a 2012 study by the School of Optometry at l’Université de Montréal, found a 94% failure rate with random sampling of eyeglasses ordered online. Such failures could include: a) The glasses sent did not adhere to the prescription or the IPD (interpupillary distance) as ordered; b) The glasses did not meet the basic comfort and position criteria.

Industry Has Attracted Large Global Players

Thus far, we have determined that the eyeglass industry is very large, should show strong growth as the median age of the developed countries continues to advance and the traditional “brick and mortar” distribution channel should not be displaced by the Internet. Consequently, this industry has attracted some large players.

a) Luxottica Group (LUX-MIL): An Italian public company (market cap ~€19 billion), The Luxottica Group is the largest vertically integrated participant in the global eye-wear industry. Luxottica owns a number of retail distribution chains including Lens Crafters, Pearle Vision, Sears and Target Optical, Sunglass Hut and OPSM Group (based in Australia and New Zealand). Its retail footprint consists of ~7,000 stores. In addition to its retail network, Luxottica owns several brands including Ray-Ban, Oakley and Persol. It also owns the optical license (for frames) for such designer brands as D&G, Chanel, Prada, Burberry, Versace and others. Sales of these brands to its own retail chains as well as to other optical retailers, including New Look, comprise the sales of its wholesale division.

For the 9-month period ended September 30, 2013, Luxottica reported an y/y increase in sales of 3.9% to reach €5.7 billion with an EBITDA margin of 20.7%.

b) HAL Trust (HAL-AMS): A publically traded international holding company based in Curaçao, HAL, has a market capitalization of €7.2 billion. HAL invests in companies across diverse industries primarily in Europe. One of the industries in which it is focused is optical retailers. It owns majority ownership positions in:

a) GrandVision (98.7%): Based in The Netherlands b) Atasun Optik (95%): Based in Turkey c) Shanghai Red Star (78%): Based in China Together, these three chains operate 4,920 optical stores in 39 countries (most of them under the GrandVision brand) and generated revenue of €1.9 billion (+5.5% y/y)with EBITDA margins of 11% for the 9- months ended September 30, 2013.

It also owns a 42.2% ownership position in Safilo (SFL-IT, €1.1 billion market cap), a publically traded company based in Milan. Safilo is primarily a frame manufacturer for both prescription glasses as well as sunglasses and sports eyewear. As opposed to Luxottica and the other HAL holdings, Safilo is not vertically integrated with its own retail footprint. Consistent with Luxottica, however, Safilo owns its own brands and licenses designer brands, such as Gucci, Fendi and Dior, for the optical market. It appears that 2013 will mark the second consecutive year of declining profitability at Safilo. Starting from an

EBITDA margin of 11.1% in 2011, the company posted 9.6% margin for the 9-months ended September 30, 2013 on sales that were down 2.4% y/y. Given this declining profit profile and the fact that HAL owns a controlling interest, it is not surprising that Safilo trades at a material discount to its other optical peers (see Appendix A).

c) Essilor International S.A. (EI-EN): A French public company with a market capitalization of €16.2 billion, Essilor is primarily a manufacturer of corrective lenses and optical instruments. For the 9-month period ended September 30, 2013, those two segments represented 90% of its €3.8 billion sales (+1.4% y/y). The vast majority of its remaining revenue (€258 million or 7% of 9-month sales) was from “readers” (OTC eyeglasses). In fact, thanks to its 2010 acquisition of FGX International, Essilor is the largest provider of such products. Essilor has recently expanded its strategy to incorporate an online presence. Through a March 2013 acquisition, Essilor owns a majority stake in EyeBuyDirect.com, an Internet-based retailer with operations in China, Hong Kong and the U.S. It also recently announced (February 27, 2014) that it has entered into an agreement to buy Coastal Contacts (COA – T) for $12.34 per share or $430 million. The purchase price represents ~2x sales.

With such major players who are consolidating the global optical market, it makes one wonder when one of them may turn their attention to the Canadian brick and mortar eyewear industry.

Global Players but Canadian Market Wide Open

Canada is seeing the same trends as the other industrialized countries. Using a similar methodology as we used above, we can forecast the size of the Canadian market. The one significant difference versus most European countries and North Asia (Japan and South Korea) is that Canada’s population continues to grow (primarily through immigration). With positive population growth and positive demographics (population above 64 is growing at 2.5x the rate of the total population), Canada’s optical market should show above average internal growth.

Canada’s Population Growth, Age Segmentation and Life Expectancy

Canada Today 5-Years Ago 10-Years Ago 25-Years Ago Population 34.83 33.27 31.60 26.75 Population Above 64 14.44% 13.40% 12.75% 10.67% Population Below 15 16.30% 17.07% 18.51% 20.98% Life Expectancy 80.93 80.80 79.59 76.74 Source: World Bank

Using this data, we can forecast the size of the Canadian optical market. As one can see in the following table, we believe it is a $118 billion market over the next 40 years. This corresponds to a $2.94 billion annual market or approximately $84 per capita.

Canadian Optical Market Size Pop. Needing Life Yrs Wearing Renewal Avg Region Pairs Total Market (mln) Glasses (mln) Expectancy Glasses Rate Price Canada 19 80.9 40.9 3 2 $225 $117,611 Source: Beacon Securities Ltd

Despite the size of those aforementioned players such as Luxottica and HAL Trust, the Canadian market has not yet been consolidated. While firm market share data is not available, New Look’s management believes the Canadian market breaks down as follows:

Canadian Optical Market Segmentation

Source: Company Reports

In essence, 97% of eyeglass purchases are made through brick and mortar retail outlets. Inclusive of contract lenses, which represent ~15% of the total eyewear market, the Internet has a 4% market share. As a point of reference, in 2012, 50% of books were bought through retail distribution, while only 20% of music is done so. As per the reasons that we outlined above, we believe that the Internet will not have nearly the impact on the eyewear industry as those other industries and as such, a strong retail presence will remain very important.

Of the chains, Luxottica, through its ownership of Lens Crafters, Pearle Vision and the operator of Sears Optical (outside of Quebec) is the largest company with a combined 239 outlets in Canada (but only 4 in Quebec). After that, the list of companies in terms of the number of retail outlets is: a) IRIS The Visual Group (176 stores): privately owned with stores across Canada. b) Hakim Optical (161 stores): privately owned with stores in Ontario, Nova Scotia, New Brunswick and Manitoba. c) New Look/Vogue (141 stores): public company with stores in Quebec and the Maritimes. d) FYidoctors (110 stores): headquartered in Calgary, FYi is privately owned with stores across the country, except Manitoba, Quebec, PEI and Newfoundland. e) Greiche & Scaff (76 stores): privately owned with stores in Quebec. Store count includes 26 stores within Wal-Mart.

If over 50% of the Canadian market is made-up of independent operators and with no dominant chain, it is clear to see that the Canadian market is ripe for consolidation. Aside from Luxottica, New Look is the only public company and as such is ideally suited to consolidate the independents and/or one or more of the aforementioned chains. March 10, 2014 | Page 10 Doug Cooper | 416-643-3863 | [email protected] Margaux Berry, Associate| 416-364-5148 | [email protected] New Look Eyewear Inc.

New Look Eyewear - An Ideal Consolidator

As we indicated, outside of Luxottica, New Look Eyewear is the only public company within the group of Canadian chains. It started trading as a public company in August 2003 before converting to an income trust in May 2005. On March 2, 2010, Benvest New Look Income Fund converted back to a corporation. At the time of its conversion, New Look operated a retail network of 63 stores. Prior to the acquisition of Vogue, it operated 76 stores with locations as per the table below:

Total store count Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Montreal Area 25 28 29 31 31 33 35 36 Québec City Area 8 8 8 8 8 8 8 10 Central Québec 8 8 8 8 8 10 10 10 Eastern Québec 7 7 7 7 7 8 8 8 Gatineau/Ottawa 5 6 8 9 9 10 10 10 Other 2 Total 53 57 60 63 63 69 71 76 Source: Company Reports

New Look has several competitive advantages that make it an ideal consolidator:

a) Largest Chain in Quebec: Pre-Vogue acquisition and as per the table above, New Look had a total of 76 stores, almost all of which are in Quebec (with 8 in the Ontario-region around Ottawa and 1 in Toronto). The size of New Look’s business (TTM revenue of $86.3 million) has enabled it to form preferred relationships with both its suppliers of lenses and frames. In addition, the Quebec culture (including the language) has created a significant barrier to entry for other chains looking to expand into Quebec. The average age of its stores is 3.5 years and the Company has strived to create a fashionable and contemporary look throughout its network. We believe this has created significant brand awareness. Each store has updated IT, including new CRM and POS systems. Such investments in strategic assets help both customer service and profitability. Finally, New Look’s strong brand recognition has enabled it to thrive in both urban and non-urban centres.

b) Vertically Integrated: New Look is vertically integrated from having its own lens processing facility to having eye exams in its stores administered by optometrists.

Starting within its stores, New Look can not only write prescriptions on site, but also give patients eye exams and eye health screening tests. New Look has started acquiring cutting edge optical equipment (retinal cameras used to compare historical pictures of a patients’ eye to detect changes and OCT Scanners that use 3D technology to examine the different layers of the retina) that can dramatically improve the level of customer service through early detection versus March 10, 2014 | Page 11 Doug Cooper | 416-643-3863 | [email protected] Margaux Berry, Associate| 416-364-5148 | [email protected] New Look Eyewear Inc.

its competition. In fact, even hospitals sometimes refer their patients to New Look for retina exams.

Once the eye exam is completed, the information can be relayed to its laboratory in Montreal via its updated IT systems. New Look is one of the few retailers to have such a facility. Its 60,000 square foot plant purchases generic lens blanks and grinds them into glasses based on specific prescriptions. Its in-house equipment surfaces and edges the lenses and can provide anti-scratch and anti-reflective coating. The lenses are then fitted to the frames. New Look sources all of the major fashion brands for its frames. The Montreal facility is then used as a central distribution center to supply its expanding retail network.

Finally, the finished glasses are sent to the retail store for proper customer fitting. We believe its capacity at its facility can support a much larger network than its current 141 outlets (including Vogue).

c) Experienced Management Team:

Mr. John Bennett (Chairman), through his investment holding company, Benvest Holdings Ltd, is New Look’s largest shareholder with 4.6 million shares (37%). Prior to Benvest, he was a senior executive with Scotia McLeod (now Scotia Capital). For the past 20 years, through Benvest, he has been active as a successful merchant banker, investor and builder of successful Canadian and international companies in various sectors including real estate, financial services, health and fitness management, retail optical and more recently renewable energies.

Antoine Amiel (Vice Chairman) joined New Look on May 7, 2012. Beyond his role on the Board of Directors, Mr. Amiel has been charged with the strategic development of the Company. We believe his prior role as Vice President – International Subsidiaries of Nikon-Essilor Co. Ltd (2005-2012), makes him uniquely qualified. Nikon-Essilor is a Tokyo- based joint venture between Nikon Corporation (US$6.5 billion market cap) and Essilor International (US$23 billion market cap) which manufactures and distributes Nikon ophthalmic lenses worldwide. During his tenure there, Mr. Amiel had the overall operational responsibility for five distribution subsidiaries and six factories located in the United States, the United Kingdom and Canada. Prior to his aforementioned role, Mr. Amiel was the managing director (CEO) of Nikon Optical UK ltd (2002-2005) and from 1999-2002, he was CFO of Nikon-Essilor Corporation’s ophthalmic division.

Martial Gagné, (President) first joined New Look in 2001, after gaining knowledge on the optical industry with his previous position at Rene Marchand (Sears’s optical stores). Mr. Gagné was Director of Finance and Marketing at the group, and was responsible for opening stores in Ontario. We believe his experience should be an asset in New Look’s expansion strategy. Within New Look, Mr. Gagne held different positions such as COO until he was appointed President in 2008 and elected to the Board of Directors in 2010. Mr. Gagné is also President March 10, 2014 | Page 12 Doug Cooper | 416-643-3863 | [email protected] Margaux Berry, Associate| 416-364-5148 | [email protected] New Look Eyewear Inc.

of the Fondation des maladies de l’oeil, the most important charity in Québec dedicated to research on eye diseases and associated with the eyewear industry.

New Look also has had a strong and stable board of outside directors with extensive retail, operating and investment experience. These include William (“Bill”) Cleman (former C.E.O. of Bouclair Inc., a Montreal based retail chain in the home furnishings sector); Paul Echenberg (C.E.O. of Schroders Canada and former C.E.O. of TwinPak and Executive V.P. of C.B. Pak, businesses involved in the plastic, glass and paper products industry); William (“Bill”) Ferguson (formerly C.E.O. of Imperial Trust Company, the investment holding vehicle of the Montreal based Webster family); and Emmett Pearson (C.E.O. of New Look (from the time Benvest got involved until February 2009).

d) Above Average Profitability: All of the above factors have enabled New Look to report record results. Revenue on a TTM basis (to September 30, 2013) was $86.3 million with a 18.8% EBITDA margin and a 8.5% net margin. Annualized RoE was 28%. This compares quite favourably to industry leader Luxottica, who reported a 20.7% EBITDA margin for the 9-months ended September 30, 2013. It further compares very favourably to Internet-focused Coastal Contacts (COA – T, not rated) who most recently reported revenue of $55.5 million and an operating and net loss of $2.7 million. Coastal has never reported a profitable quarter in its history.

e) Underlevered: New Look ended its September quarter with an underlevered balanced sheet. At that time, it had net debt of $12 million against TTM EBITDA of $16.2 million (0.7x). On a coverage basis, New Look’s TTM interest expense of $0.44 million was covered 36x by its EBITDA. From a debt-equity perspective, its ratio was 0.44x. Consequently, we believe New Look has the ability to take-on more debt to fund future acquisitions. We believe it could comfortably boost its leverage to 2.0x+ EBITDA and as such, coupled with an equity raise, could undertake a significant acquisition of one of the aforementioned Canadian retail chains.

This is exactly what New Look has done as it has now commenced its strategic growth program with the acquisition of Vogue Optical; a transaction which we believe will be accretive to consolidated EPS by $0.13 in the first year. We further believe that other acquisitions of one or more of the aforementioned chains could follow as New Look seeks to grow its footprint across Canada and become the pre-eminent optical retailer.

Acquisition Strategy Is In Motion – First One Very Accretive

Let the record show that on November 20th, 2013, New Look had its “coming out” party. On that date, the company announced its first acquisition and a $25 million bought deal, equity financing (@ $11.60) that brought the company its first institutional shareholders. The stock immediately gapped higher as the market realized both the very accretive nature of the transaction, as well as the increased liquidity of the shares.

The Target:

New Look has acquired Vogue Optical. Vogue Optical is the largest optical chain in The Maritimes, having been family-owned since its inception. With 65 stores (21 in New Brunswick, 21 in Nova Scotia, 15 in Newfoundland and Labrador, 5 in PEI and 3 in Western Canada), it has an estimated 20% market share in the Maritimes. The lion’s share of the market still belongs to independents. For FY13, Vogue should generate revenue of ~$40 million or an average of $615,000/store. While this is lower than the $1.2 million average per store of New Look (principally because of smaller population centres), we believe the level of profitability is higher.

Synergies:

Management of New Look believes there is a strong strategic fit with Vogue. The two are completely complementary in terms of footprint (New Look almost entirely in Quebec and Vogue almost entirely in The Maritimes) and makes the combined entity the largest optical retailer east of Ontario by a wide margin. Furthermore, as does New Look, Vogue has very strong brand recognition in its region of operation. From a financial synergistic perspective, we believe there is room to expand margins at the combined entity through purchasing synergies, better terms with suppliers and operating on a common IT platform.

Purchase Price:

New Look paid $74 million for Vogue, through a combination of debt and equity. To satisfy the funding requirements, New Look entered into a new debt facility consisting of $45 million senior term, $15 million junior term and a $10 million revolver. It also issued $25 million of equity @ $11.60. From a valuation perspective, New Look paid 1.85x sales, and 8.2x our EBITDA estimate. With assumptions of synergistic savings, the purchase valuation could drop to 7.8x.

EPS Accretion:

Our stand alone New Look model has the company earning $0.72 per share in FY13. Based on its internal growth rate of opening 5 new stores in FY14, we had EPS growing to ~$0.79. With the full-year addition of Vogue, we anticipate adjusted EPS to reach $0.92, excluding the amortization of acquisition related intangibles. In other words, we believe this transaction is EPS accretive by $0.13. While the two companies had similar multiples, the fact that two thirds of the purchase price was satisfied through attractively priced debt makes the deal very accretive. The math works as follows:

 $0.46 of straight accretion from the consolidation of Vogue’s profitability, including ~$0.06 of amortization of intangibles from the transaction;

 ($0.14) dilution from the 20% increase in the number of shares outstanding;

 ($0.18) dilution from the incremental interest expense associated with the increased debt.

Financial Forecast

New Look’s revenue is based on a traditional retail model with prescription eye glasses representing the lion’s share of its revenue. The addition of Vogue increases New Look’s retail footprint by 46% to 141 stores. Over our projection period, we have assumed New Look grows its store count to exit FY15 at 150. Given its location in smaller urban areas, Vogue carries a lower revenue per store than New Look ($0.6 million versus $1.2 million). Nevertheless, according to the Business Acquisition Report (BAR), Vogue’s TTM EBITDA margin was 22.2% versus 18.3% for New Look.

As we indicated earlier, we believe this acquisition is very accretive. We forecast EBITDA per share growing from $1.53 in FY13 to $2.10 in FY14. Excluding the amortization of acquisition related intangibles, we forecast that New Look’s EPS will grow from $0.72 to $0.92. The highlights of our forecast are noted below.

Revenue, EBITDA and EPS Forecast (FY12-FY15e)

($000s) FY12 FY13E FY14E FY15E Revenue 82,296 87,600 134,601 141,801 EBITDA 15,313 16,118 26,248 28,412 Adj EPS 0.63 0.72 0.92 1.06 Source: Company Reports and Beacon Securities Ltd

Balance Sheet, Cash Flow and RoE

With the acquisition of Vogue, New Look has taken on more debt as detailed earlier in the report. Even with this increased leverage, its interest coverage should still be 7x EBITDA with a net debt/equity of ~ 1.3:1 Given its high EBITDA margins (~20%) and relatively low maintenance cap-ex, New Look should generate significant free cash flow. In FY12, it generated $0.56 per share and we forecast it to grow to $1.19 in FY15 as a result of its growing business as well as the acquisition. The free cash flow to date has funded the $0.60/share dividend (3.7% dividend yield). With the increased cash flow, we do not anticipate a dividend increase but rather the incremental cash to be used to grow the company, through the tuck- under acquisition of independents or to pay down debt. The $7.5 million dividend payment represents 28% of EBITDA and 73% of forecast FY14 net income, dropping to an estimated 63% in FY15.

From a returns perspective, New Look has historically generated a very strong Return on Equity (RoE), Return on Assets (RoA) and EBITDA/Net Assets (fixed assets + working capital). This last ratio excludes non- productive assets such as goodwill and other intangible assets and is a very good indicator of efficiency. Typically a number above 50% for this ratio is very good. Note that RoE and RoA decline in our model given the increased asset base, reflective predominantly of goodwill and intangible assets from the acquisition of Vogue Optical.

Strong Return Metrics

2010 2011 2012 2013E 2014E 2015E ROE 69% 29% 26% 28% 24% 20% ROA 14% 19% 21% 22% 15% 12% EBITDA/Net Assets (fixed assets + w.c.) 49% 66% 66% 60% 68% 56% Source: Company Reports and Beacon Securities Ltd

Valuation – What’s It Worth?

From a valuation perspective, we believe the shares of New Look are undervalued and the current price doesn’t reflect the positive macroeconomics of the industry, the potential to strategically grow its Canadian footprint, or its potential to be purchased by one of the major global players. From a risk-return perspective, let us first examine the downside protection followed by the upside potential.

Downside Protection

We believe potential downside to the current share price of $15.60 is limited by the profitability of the company as well as its dividend, which is fully funded. From a financial perspective, New Look has generated TTM revenue, EBITDA and EPS of $86.3 million, $16.2 million and $0.69 respectively. However, with the acquisition of Vogue, this increases to ~$127 million and an estimated $25 million and $0.89 on a pro-forma basis. At its current price and with an EV of $266 million, the stock is trading at 2.0x EV/Sales, 10.1x EV/EBITDA and 20x P/E, multiples that are below its industry peers.

Its leadership position in Quebec and the Maritimes and the positive dynamics of those geographic regions should ensure continued strong results even under a status quo scenario. Under such a scenario, we believe New Look would represent an attractive acquisition candidate to either Luxottica, HAL Trust or Essilor International if the Company were to choose to pursue that route. Finally, we believe the stock would find support near current levels given its current yield of 3.6%. All of these factors should help to limit downside.

Upside Potential

With the accretive acquisition of Vogue, coupled with its own internal growth and the ability to bolt-on independent stores through acquisition, we believe New Look is primed for strong earnings growth. As revealed above, we forecast EBITDA and adjusted EPS (excluding amortization of acquisition-related intangibles) to grow from $16.1 million and $0.72 in FY13 to $26.2 million/$0.92 and $28.0 million and $1.06 for FY14 and FY15 respectively. Over this 24 month period, we would further anticipate other strategic acquisitions that could add materially to our forecasts. Based on FY15 estimates, New Look’s immediate peer group within the global eyewear industry trade at an EV/EBITDA of 12x and a P/E of 24x. Similar multiples would yield fair values for New Look of $22.00 and $24.50 respectively.

Such a valuation range is confirmed by our DCF analysis. Using a discount rate of 10% against our forward cash flow estimates yields a fair value of $24.92.

Risks

Competition - Internet: The Internet has been a disruptive force in almost every industry it has touched including the ones we mentioned earlier in the report. Companies such as Coastal Contacts (COA – T, recently acquired by Essilor for $430 million or 2x sales), with 2013 revenues of $218 million, are attempting to expand the Internet’s presence in the eyewear industry not only in Canada but also internationally (34% Canada versus 66% internationally). However, its traction to date has been predominantly with contact lenses and low-end eye glasses prescriptions. Consequently, we do not see the Internet as a major threat to New Look whose focus has been on building its strong brand(s) through excellent customer service with in-house opticians, custom fittings and fashion merchandising.

Competition – Laser Surgery: Surgical techniques such as laser surgery to correct vision problems may have a negative impact on the sales of glasses. However, laser surgery has been widespread since the 1990s. Over this 20+ year experience, most patients who have had such surgery still need/will need glasses. In fact, the number of procedures peaked more than a decade ago and have been declining ever since. Consequently, laser surgery has had little impact on the size of the eyewear market.

Competition – Other Retail Chains: With any retail market, there is always the threat of price competition from existing competitors. However, as we have indicated, independents continue to control ~50% of the Canadian market and do not have the financial wherewithal to be a significant threat. Furthermore, the major chains in Canada are private and we believe are more likely to be for sale as opposed to aggressively growing their footprint. With New Look’s focus on building its brand and the quality of its service, we do not believe other chains are a threat to New Look, especially given its leadership position in Eastern Canada.

Integration of Acquisitions: New Look has just made its first material acquisition. As such, there is the risk that the integration of it, as well as any future acquisitions, may not go as smoothly as planned. Nevertheless, we believe this risk is mitigated by the recent addition of a very experienced management team headed by Mr. Amiel. Furthermore, New Look boasts a very experienced Board of Directors who bring both industry expertise as well as significant M&A expertise.

Initiating Coverage with BUY

In our introduction, we identified a “wish list” for investors:

a) Participates in a long, multi-generational trend: New Look is a purveyor of eyewear. As our research indicates, almost everyone over the age of 40 needs to wear glasses. With the median age above 40 in virtually every industrialized country, the market for glasses is very large and undergoing strong secular growth.

b) The Company has a market leading position: New Look is the leading retail chain with significant brand recognition in the province of Quebec and with the acquisition of Vogue, it is now the leader in the Maritimes as well.

c) Generates recurring revenues: The nature of the eyeglass market is that it generates recurring revenues as patients should be updating their prescription every 3 years. Given New Look has optometrists in-house, we believe this creates client “stickiness”.

d) Generates above average RoE: New Look’s 20% EBITDA margins have helped to drive RoE of ~25%. We believe such high returns should help the Company trade at premium valuation multiples.

e) Pays a dividend: New Look pays a $0.60/share dividend and has a current yield of 3.7%. It is fully funded with a payout ratio of 65% based on our FY14 adjusted EPS forecast. As the Company grows, we expect its payout ratio to drop as the incremental free cash flow is retained to fund internal or acquisition-fueled growth.

As one can see, we believe New Look checks all of the boxes. With an underlevered balance sheet, a management team that will continue to look to aggressively grow through acquisitions, and a Canadian landscape that is conducive to such a strategy, we believe the shares of New Look offer an excellent risk-return opportunity. As such, we are initiating coverage of New Look Eyewear with a Buy recommendation and a 12-month target price of $24.00 based on 24x the blended EPS forecast of FY14/FY/15.

Appendix A: Comparable Companies

Eyewear Comparable

Sales (MM) EBITDA (MM) EBITDA Margin EPS FD EV/EBITDA EV/Sales Price/Earnings

Market Enterprise Dividend Company Ticker Last Price Capitalization 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E Value (MM) Yield (MM)

New Look Eyewear Inc. BCI-TSE $16.43 $208 $272 3.7% $134.6 $141.8 $26.2 $28.4 19.5% 20.0% $0.80 $0.94 10.3x 9.6x 2.0x 1.9x 20.5x 17.5x

Luxottica Group S.p.A. LUX-MIL 39.60 € 18,915 € 20,381 € 1.6% 7,721.6 € 8,321.5 € 1,576.4 € 1,761.0 € 20.4% 21.2% 1.52 € 1.76 € 12.9x 11.6x 2.6x 2.4x 26.1x 22.5x Essilor International SA EI-PAR 73.41 € 15,761 € 16,011 € 1.3% 5,589.9 € 6,079.1 € 1,259.4 € 1,387.7 € 22.5% 22.8% 3.16 € 3.51 € 12.7x 11.5x 2.9x 2.6x 23.2x 20.9x Fielmann AG FIE-ETR 93.79 € 3,939 € 3,939 € 2.9% 1,226.3 € 1,289.9 € 248.9 € 263.1 € 20.3% 20.4% 3.56 € 3.80 € 15.8x 15.0x 3.2x 3.1x 26.4x 24.7x Safilo Group S.p.A. SFL-MIL 16.02 € 998 € 998 € 0.0% 1,220.4 € 1,311.5 € 145.7 € 170.4 € 11.9% 13.0% 0.84 € 1.11 € 6.8x 5.9x 0.8x 0.8x 19.0x 14.4x Peers Average 12.1x 11.0x 2.4x 2.2x 23.7x 20.6x Source: FactSet Estimates, Beacon Research

New Look Eyewear Inc.

Appendix B: Financial Statements Income Statement

Year End: December 31 $000's except per share figures FY10 FY11 FY12 FY13e FY14e FY15e

Revenue $ 70,778 $ 80,190 $ 82,296 $87,600 $134,601 $141,801

Operating Expenses: Material Consumed - Net change of inventory $16,984 $17,895 $18,254 $19,710 $30,352 $31,786 Salaries 21,637 24,945 25,533 27,156 $40,716 $42,421 Other (SG&A, Marketing, Store Occupancy Cost) 21,980 24,000 23,196 24,616 $37,284 $39,183 Total operating expenses 60,601 66,840 66,983 71,482 108,353 113,389

EBITDAS 10,177 13,350 15,313 16,118 26,248 28,412

Amortization 3,950 4,313 4,960 4,790 8,142 7,983 EBITS 6,227 9,037 10,353 11,329 18,107 20,428

Total net interest expense 405 366 432 536 3,594 3,388 EBT & other expenses 5,822 8,671 9,921 10,793 14,512 17,040

Other expenses (Restructuring, FX, stock based comp) 853 114 216 0 0 0 EBT 4,969 8,557 9,705 10,793 14,512 17,040

Tax Expense and non-controlling interests -6,524 2,533 3,227 3,238 4,354 5,112 Net income 11,493 6,024 6,478 7,555 10,159 11,928

Shares Outstanding 10,022 10,075 10,197 10,399 12,554 12,554 EPS (basic) 1.15 0.60 0.64 0.73 0.81 0.95 Adj EPS, excluding acquisition-related intangibles 0.92 1.06

Shares Outstanding (FD) 10,064 10,134 10,318 10,533 12,689 12,689 EPS (FD) 1.14 0.59 0.63 0.72 0.80 0.94

Balance Sheet

Year End: December 31 ($000s) FY10 FY11 FY12 FY13e FY14e FY15e ASSETS Cash $1,496 $1,418 $1,534 $2,017 $18,559 $20,985 Accounts receivable 954 1,080 1,533 1,680 2,581 2,719 Tax Credit Receivable 0 15 158 158 158 158 Inventory 7,412 7,699 7,503 8,100 12,474 13,063 Prepaid expenses 453 302 318 318 318 318 Other 0 0 0 0 0 0 Total Current Assets 10,315 10,514 11,046 12,273 34,090 37,243

Loans and Advances 30 130 300 300 300 300 Fixed assets 17,138 17,887 22,960 23,460 34,391 33,857 Tradename 2,500 2,500 2,500 2,500 2,500 2,500 Deferred tax 7,187 4,750 1,736 1,736 1,736 1,736 Intangibles 2,730 3,289 2,632 2,342 22,270 19,820 Goodwill 5,958 6,147 6,397 6,397 46,397 46,397 Other 0 0 0 0 0 0 Total Assets 45,858 45,217 47,571 49,009 141,684 141,854

Liabilities and Shareholders' Equity Bank debt 0 0 0 0 0 0 Accounts payable & accrued liabilities 8,471 10,656 8,958 9,792 14,843 15,533 Dividends payable 0 0 0 0 0 0 Income taxes payable 22 9 0 0 0 0 Instalments on long-term debt 503 497 712 1,295 6,209 6,150 Total Current Liabilities 8,996 11,162 9,670 11,087 21,052 21,683

Long-term debt 10,526 7,406 9,104 7,809 61,600 55,450 Deferred lease inducements 2,639 2,535 2,399 2,399 2,399 2,399 Provisions 6,731 0 0 0 0 0 Other 0 0 0 0 0 0 Distribution and dividends payable 0 0 0 0 0 0 Total Liabilities 28,892 21,103 21,173 21,295 85,051 79,532

Share capital 23,093 23,521 25,457 25,457 50,457 50,457 Retained earnings (6,162) 537 867 2,183 6,102 11,791 Non-Controlling Interest 35 56 74 74 74 74 Total Shareholders' Equity 16,931 24,058 26,324 27,640 56,559 62,248

Total Liabilities and S.E. 45,858 45,217 47,571 49,009 141,684 141,854

Statement Cash Flow

($000's) FY10 FY11 FY12 FY13E FY14E FY15E Net Income 4,762 8,557 9,705 7,555 10,159 11,928 Depreciation 3,843 4,313 4,709 4,790 8,142 7,983 Other 339 139 355 0 0 0 Cash Flow Operations 8,944 13,009 14,769 12,344 18,300 19,912 Changes in non-cash WC 909 1,763 (1,992) 90 (224) (37) CFO (inc. changes in WC) 9,853 14,772 12,777 12,434 18,076 19,874

Capital expenditures (2,980) (3,841) (8,789) (5,000) (39,000) (5,000) Acquisition of other intangible assets (116) (305) (221) 0 0 0 Business Combinations (1,686) (1,293) (410) 0 (40,000) 0 Other (Net) (187) (390) (317) 0 0 0 Cash Flow Investing (4,969) (5,829) (9,737) (5,000) (79,000) (5,000)

Principal Repayments (1,251) (3,123) (1,904) (712) (1,295) (6,209) New Equity 138 502 1,903 0 25,000 0 New Debt 3,705 0 3,750 0 60,000 0 Dividends and other (6,819) (6,056) (6,148) (6,239) (6,239) (6,239) Cash Flow Financing (4,227) (8,677) (2,399) (6,951) 77,466 (12,448) Other (Net) 0 (344) (525) 0 0 0 Cash Flow 657 (78) 116 483 16,542 2,426

Cash, begin period 839 1,496 1,418 1,534 2,017 18,559 Cash, end period 1,496 1,418 1,534 2,017 18,559 20,985

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As at # Stocks Distribution February 28, 2014 BUY 22 62.9% BUY Total 12-month return expected to be >15% Speculative Buy 5 14.3% SPECULATIVE BUY Potential total 12-month return is high (>15%) but given elevated risk, investment could result in a material loss HOLD 3 8.6% HOLD Total 12-month return expected to be between 0% and 15% SELL 1 2.9% SELL Total 12-month return expected to be negative Restricted 1 2.9% Under Review 3 8.6% Total 35 100%

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