Description

1-800 CONTACTS (CTAC) is the world’s leading direct marketer of replacement contact lenses. The Company sells an ideal product (contact lenses) through mail-order, their telephone number, and the Internet. The product is ideal for the following reasons:

 Small size and low weight – keeps packaging costs and shipping charges low
 Uniform sizes – contacts are under the same regulation at the FDA as a toothbrush and the population wears sizes in a standard bell curve formation making inventory prediction easier
 Long shelf life – contacts have 2-3 year shelf-lives
 Not influenced by consumer taste – consumers are presented with a prescription for not only the size/shape but also the manufacturer so returns are nominal
 Recession resistant – even in down markets, people with poor eyesight need eye correction
 Recurring revenue stream – over 50% of the U.S. contact wearers use disposable lenses lending well to replacement companies like CTAC

The financial metrics seem rich for a company projecting only 15-20% growth. However, at 20% growth the Company is projecting ’01 revenue of $174 million while gross margins will increase from 40% to over 41.5%. With steady advertising of $25 million and no significant increases in other SG&A expenses, CTAC will record about $30 million of EBIT and about $18 million of net income. This does not include a significant net increase in cash which will be earning 4%+ interest not included in the analysts projections.

With changing state and federal laws requiring manufacturers to sell to direct marketers like CTAC, the 41.5% gross margin projection could be significantly low as optical stores have 55-60% gross margins. Additionally, the company is over 3 times larger than it’s nearest competitor and could bulk up it’s sales through an acquisition without impacting/increasing operating expenses.

Catalyst

Understated industry dynamics changing in the Company's favor as well as revenue and gross margin growth opportunities beyond what the two industry analysts who cover the Company have projected.