Kits Eyecare Ltd. (KITS) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining Kits Eyecare's Second Quarter 2026 Earnings Call. With me on today's call are Roger Hardy, Chief Executive Officer; Joseph Thompson, Chief Operating Officer; and Ibrahim Kamar, Chief Financial Officer. Before I begin, I am required to provide the following statement respecting forward-looking information, which is on behalf of Kits and all of its representatives on this call. Certain statements made on this call will contain forward-looking information. These forward-looking statements generally can be identified by the use of forage such as intend, believe, could, expect, estimate, forecast, may, would and other words of similar meaning. This forward-looking information is based on management's opinions, estimates and assumptions and lack of their experience and perception of historical trends, current conditions and expected future developments as well as factors that are currently believed are appropriate and reasonable investor constants. Actual results could differ materially from a conclusion, forecast expectations belief, our prediction, the forward-looking information and certain material factors and assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information, management cautions, investors, not to rely on forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information containing Kits filings with Canadian provincial security regulators. During today's call, all figures are in Canadian dollars, unless otherwise stated. And with that, I will turn the call over to Roger.

Thanks, operator, and thank you to everyone for joining us today. When we set out to build Kits, the mission was simple: make eye care easy, easy to buy, easy to afford and easy to get glasses and contacts fast. Everything we've built since our own vertically integrated lab, our own beautiful frames, optician AI, our Autoship program exists and serves [ that ] mission. The second quarter is what looks like when more than 1 million customers respond to it. Revenue for the quarter was $58.4 million, up 7.8% year-over-year and 17.9%, bringing our first half revenue to $115.9 million or up 20.5%. Glasses reached $11.1 million, up 54% and now represent almost 19% of our business, up from just 14.5% a year ago. Net income in the quarter was $1.5 million compared to a loss of $0.7 million in the prior year period. Operating cash flow was a standout and was a record $7.8 million, and we ended the quarter with $27.4 million in cash and no debt, our 15th consecutive quarter of positive adjusted EBITDA, with the strongest balance sheet in our history. Coming into 2026, we made a deliberate decision to point the company's acquisition and merchandising effort at building out the glasses business. The reason is simple. We design the frames. We cut the lenses in our factory, and we ship made-to-order products off in the same day. When you own every step, each incremental pair carries more margin and gets the customers faster, this quarter validated those decisions, 148,300 pairs of glasses were delivered, up 32.4%. Premium lens upgrades were 45.2% of glasses revenue and new glasses customers spent 50% more on their first order than the same cohort a year ago on identical entry level pricing. Not one thing did that, but customers are taking more pairs. They're upgrading their lenses. They're buying into categories we've added like progressive readers and anti-fatigue lenses and they're finding all of it faster because of tools like optician AI, they help customers make the right choice, the easy choice, has nothing to do with price increases. It's just been good product and guidance compounding. In fact, glasses customers acquired this year are generating first order revenue that exceeds the multiyear cumulative revenue of glasses customers we acquired in earlier years. The newest cohorts are our best cohorts and the gap is widening, making eye care easy shows up in the P&L has bigger baskets. The trade-off stated plainly, total revenue growth decelerated from Q1's pace. That was the cost of the glasses focus, and we knew it going in. Glasses as a higher consideration purchase, you acquire fewer customers per marketing dollar but each one is worth substantially more as we talked about at the end of Q1. We acquired 9,800 new customers in the quarter, and their first order economics are the strongest in any cohort of our history. In the back half, we plan to rebalance. We will keep the glasses momentum, which is increasingly organic, driven by cross-sell and repeat purchasing and we'll put the full weight of acquisition back behind contact lenses which remains the most proven customer generation engine we have and the front door through which most kids relationships begin. Both engines will run solidly in the back half. The durable part of the business is what happens after the first order. Repeat customers contributed 65.5% of revenue up from 60.6% a year ago, $38.3 million of repeat revenue an increase of $8.2 million. Put another way, our installed base on its own grew 27% year-over-year, faster than the business as a whole and new customer revenue grew as well. So the mix shift reflects repeat growing faster, not new shrinking. Our 2-year active customer base is $1.1 million, up 15.2%. Our Autoship is now a $24.6 million annuity that cost almost nothing to maintain. Our average order value was $213, up 15.8%. Customers come to us for contacts then buy glasses, then buy their second and third pair, 78,500 pairs went to repeat customers this quarter, up 51%. They do this because the model works for them, quality, value and speed in a combination, nobody else in the category delivers because nobody else owns the full stack from design to lab to doorstep. We earned the first order and our model earns the rest. How big is the opportunity? Eye care is an enormous category, still early in its shift online, and we're one of the only vertically integrated direct-to-consumer platforms operating at scale in North America. Every new customer lands on infrastructure we already own and enters a cohort that historically spends more each year they stay with us. Its growth that funds itself on a fixed asset base in a market this size, that presents asymmetric upside. This is the model working as designed, a vertically integrated platform where growth fund itself consider the combination in these results, first half constant currency growth of 22%, positive and growing net income and operating cash flow equal to 13% of revenue in the quarter. Very few companies grow at this rate and even fewer do it while generating cash. We're fortunate to be one of them. The business is now paying for its own acceleration and continues to compound. Looking ahead to Q3, we expect continued momentum with revenue projections in the range of $62 million to $64 million and an adjusted EBITDA margin between 4% and 6%. With that, I'll turn the call over to Joe to share more on the operational highlights. Joe?

Thanks, Roger. In addition to posting record results, the team was also hard at work building new products and innovation that we believe will power revenue and earnings in the quarters to come. Let's start with our premium lens portfolio, which already represented 45.2% of glasses revenue this quarter. In Q2, we launched anti-fatigue lenses designed to reduce ice rain during screen time and close up work. Also, in Q2, we expanded our Pangelin smart glasses into the sports category, taking a product that proved itself with early adopters and pointing it at an audience that trains, rides and runs in their eyewear every day. Our vertically integrated model helps us here. Each one of these launches lands on infrastructure we've already built adding revenue on a design lab and fulfillment asset base. Second, we widened the front door. For many Canadians, eye care starts with their insurance plan. This quarter, we expanded our Canadian insurance program to add Manulife, one of the largest insurers in the country to our direct billing platform integrated with TELUS Health eClaims, Manulife group benefit members can verify their vision coverage in real time, reduce upfront out-of-pocket costs and eliminate manual claims submission putting seamless coverage in reach of millions of members. And third, late in Q2, we launched our kids Toronto retail location, a physical front door in the largest optical market in Canada. Building on the success of our Kids Beach location in Vancouver, our Queen Street West flagship offers an opportunity for everyone in Toronto to experience the kids brand. Kids Toronto is off to a strong start, and we believe this unique concept and location will build awareness, traffic and trial for KITS for years to come, while creating a halo effect that lifts digital demand across the surrounding region. In Q2, the KITS flywheel continue to spend with more invention, more reach and even more to come in the second half of 2026. With that, I'll turn it over to Ibrahim for the financials.

Thank you, Joe, and good morning, everyone. I'll recap the P&L briefly and then spend most of my time on the balance sheet as that's where this quarter really stands out. Gross margin expanded 160 basis points to 37.9% and this quarter's expansion was organic, no tariff refund benefit just continued execution across the team. Adjusted EBITDA was $2.9 million or 5% of revenue, up 14.3% year-over-year and our 15th consecutive positive quarter. Net income was $1.5 million or $0.04 per share compared to a net loss of $700,000 or a loss of $0.02 per share a year ago. On operating expenses, marketing represented 17.4% of revenue, up year-over-year from 15.2%. As Roger noted, this was a deliberate returns-driven investment into customer acquisition, mainly in glasses, and we added 90,800 new customers in the quarter. Fulfillment was 10.9% of revenue, up modestly from 10.7% in Q2 2025 on higher fuel surcharges, though it improved to 10.7% for the first half of 2026 as automation and order consolidation efficiencies offset those pressures. G&A was 7.6% of revenue compared to 7.3% in Q2 2025. Excluding share-based compensation, G&A improved to 5.3% of revenue, down from 6.1% in Q2 2025 as revenue growth continued to outpace our infrastructure costs. Now to the balance sheet. We ended the quarter with $27.4 million in cash, up from $19 million at the end of Q1 and zero debt, including our fully undrawn $15 million ABL facility with the Bank of Montreal we have roughly $42.4 million of accessible liquidity and the $5 million uncommitted accordion. Several things drove that step up. First, cash generation. Operating cash flow was a record $7.8 million, about 2.7x adjusted EBITDA, and free cash flow was $6.4 million, reflecting the working capital normalization we flagged in our Q1 disclosure, including optimization of inventory levels and collection of the tariff receivable; second, we cleaned up the capital structure. We repaid the remaining $290,000 promissory note, retiring the loss of our legacy debt, and we exited our Bitcoin ETF treasury position. Third, we began returning capital, repurchasing and canceling 89,200 shares for $1 million at an average of $11 per share under our normal course issuer bid. The take away is flexibility. We can continue to invest in glasses and customer acquisition where the returns are there, absorb seasonal working capital streams and return capital to shareholders. all from internally generated cash with no debt and ample liquidity. We entered the second half with a strong balance sheet and growing an increasingly loyal customer base and the glasses business that is inflecting. Operator, we are now ready for questions.

[Operator Instructions] Your first question comes from Luke Hannan from Canacard Genuity.

My first question is a bit of a long run with many parts so apologies for that. But really, what I'm trying to unpack is what the margin bridge is going to be for the balance of the year, taking into consideration the guidance for Q3 and specifically, what I'm looking to hear a little bit more on is how the contact growth, which you called out, that should accelerate in the second half because of there being a bit more of a focus there. But I'm curious to know what the progression will look like when it comes to marketing spend, what you expect for fuel surcharges? And then similarly, the stock-based comp, which was called out in the G&A line. Curious to know how that's expected to trend for the balance of the year.

Thanks for the question. So maybe we'll tackle it piece by piece. Starting with gross margin, which you saw was elevated again in the quarter to 37.9%. It was up about 160 basis points year-on-year, which is a great starting point. And underneath that, so continued march up over time of the gross margin line. Now maybe going into the marketing spend. And as we've talked, this was a deliberate investment in the first half in prescription glasses. When starting in Q2, we gradually reduced spend throughout the quarter, ending at levels back similar to historical levels. So moving forward, the base is set in the mid-teen level, but we'll continue to evaluate this on a quarter-by-quarter basis. reacting to some of the cohort performance that we've seen. So strong gross margin stabilized and flexible marketing spend. And then -- if you look back, fulfillment has continued to be a leverage point over the past couple of quarters and over the past couple of years. Maybe I'll turn to Ibb to talk a little bit about what we saw in the quarter and the first half on fulfillment and G&A.

Great question. fulfillment, we did see up modestly from Q2 2025, reaching 10.9% of revenue this quarter, a portion of that was driven, as you mentioned, by the fuel surcharges. In Q1, we start seeing our partners introducing fuel surcharges across their networks we did a deliberate decision not to increase or pass any of these charges to our customers and said we're managing it directly with our carrier partners and absorbing such costs through fulfillment efficiencies as we continue to optimize and leverage our vertically integrated manufacturing and volume scale. For H1 overall, you could see the support to that approach. H1 fulfillment expenses was down year-over-year to 10.7% of revenue despite the fuel surcharge headwind. And just to touch base here on your share-based comp, equity compensation is an important part of our compensation plan and how we retain management team that were the management team that was delivered this level of performance. We view this as the right kind of increase, the equity we used to return this team is worth more today because shareholders who've been with us have participated in that same appreciation. Yes, overall, G&A was 7.6% of revenue compared to 7.3% last year. Usually, Q2 is unusually elevated due to the timing of when these options are granted. But overall, we're seeing it to be consistent with previous years and to be sub 2% for the year.

That's great. And then for my follow-up, and then I'll pass the line. I'm curious to know just on the Toronto store rollout and the marketing that you would have incurred around that. I'm just curious to know, I guess, what you have learned from that if the margin that you deployed, is that in line with your previous on this town strategy or do you pilot anything new that allowed you to learn something incremental about your customer or how you go to market? And maybe does that inform or change your approach rather for how you plan on deploying your Own This Town initiative moving forward?

Sure. Yes. Sure, Luke. Excited to talk about our Toronto flagship. So it's important to note the Toronto flagship on Queen Street West. It's soft opened right at the end of Q2. So the results, which have been strong since the opening are -- we're not in the Q2 numbers, but we expect it to continue to contribute in Q3, Q4 and beyond. The space is a great one. As you saw at our event last month, over 2,500 square feet right on the corner at 735 Queen Street West. It's about 2x the size of our Vancouver flagship and it's already contributing even in the first month at levels above our expectations. So for us, Vancouver was a proof-of-concept stores amplifying brand awareness and then really haloing the entire region with digital performance. The investment in the market of Toronto really builds on, as you would expect, the learnings of Vancouver, which have been very strong. And so expect a thoughtful expansion from us here on future stores. And as you would expect, each market will learn from the previous one and we'll get more efficient.

Your next question comes from Martin Landry from Stifel.

I would like to dig a little bit in your marketing expenses. I understand the comments that they're a little higher because you're trying to acquire glasses customers. So I understand that strategy and those glasses customers are supposedly a little bit more lucrative -- but we don't see that benefit in your profitability when we look at your EBITDA margin, it's stable on a year-over-year basis. So I assume there's a customer lifetime value angle here that is hard for us to capture. So I was wondering if you could provide a little bit more color on that. And if you could compare and contrast maybe the customer lifetime value of a glasses customer versus a Lance's customer?

Maybe I'll start on this one and then pass the line to Ibb or Roger to see if there's more to add. So thanks for bringing it forward. We did see, as we've talked, a real shift towards glasses cohorts and disproportionately premium glass cohorts. So to your LTV question, 2 things that we look for and have been delighted with the results in previous years is the Y Intercept. So where does the initial first order revenue come in and the slope over time for each of these cohorts. And so on the glasses customers generating first order revenue in the quarter that was about 50% higher than the Q2 2025 cohort. On -- with everything else being relatively similar on the pricing level. So we're seeing the recent cohorts come in at a higher Intercept. And what we've seen in previous cohorts that we believe will continue is the continued slow progression of these customers as they come back. Now you mentioned the comparison to contact lenses, I think this quarter was a real testament to the annuity of that business with an investment in new customer growth and still seeing over 65% of the revenue coming from repeat customers. So this is something that we have a lot of experience in. We're very confident in the in the active customer base that we have, which grew again over 15% in the quarter to over 1.14 million customers and we see them in all of the data that we see coming back again and again. So maybe I'll stop there and see Roger, Ibb, if I missed anything.

Yes. Thanks, Joe. I think it's I think you've covered most of it. I think it's important to note, every acquisition dollar is underwritten by cohort data that our marketing department is tracking daily, weekly. So externally, you can see it in the repeat revenue climbing as a share of sales. You can see double-digit growth in the 2-year active customer base, and you can see the AOV moving up again and again. Underneath that data, you see a contact customer who's cross-selling into glasses, and they're worth materially more than just a contact-only customer. Our more recent cohorts are also ramping faster than any prior cohort or generation. So the strong paybacks are encouraging us to continue to invest. And our acquisition strategy has shifted deliberately towards this type of quality customer. Our new customer revenue was 34.5% in the quarter and that was at meaningfully higher first order values. So we've got a lot of that repeat business doing a lot of the work and that business makes up 65.5% of business with 80% to 90% cohort retention. So we're not reliant on the acquisition of the business for these quarters to continue to compound. We've got such a nice healthy base of customers that continues to fund our growth and fund and demonstrate the growth. So yes, hopefully, that covers your question, Martin.

\ Yes. I mean -- and maybe it's maybe the segues into your guidance for Q3. We're seeing your revenue growing rapidly but you're guiding for an EBITDA margin of 4% to 6% which at the midpoint is also going to be stable to down on a year-over-year basis. So I'm trying to understand why we're not seeing a little bit more of a pickup in and profitability on a percentage basis given your revenues are growing rapidly and you should get some fixed cost absorption.

Yes. Thanks, Martin. We did see a strong growth in Q2. And then importantly, on the gross margin lines, an increase of 160 basis points to 37.9%. I think as we think about Q3, it will be continued growth on new customers on the glasses side. But as you heard us in the prepared remarks and in the first few questions, really having a balanced weighting behind both growth on glasses and contact lenses. And so I think the guidance of $62 million to $64 million in Q3 from a revenue standpoint, reflects both engines running. And over the past 6 months, we've seen glasses growing very healthily over 50% -- but growing contact lens is something we've been doing at industry-leading rates for over 4 years. So as in our DNA and the team is excited at delivering higher growth here in the back half. To your question on some of the operating lines, I think Ibrahim talked very well about some of the short-term pressures that we've been seeing in Q2, some some fuel surcharges -- and I think we'll continue to talk about quarter-on-quarter numbers. but we'll continue to look at it on the arc of a year or multiple years. So as we think about our progress on adjusted EBITDA, 2023, 2%, 2024, 4%, 2025, 5.8% and then year to date in 2026 just over 6%. So as you mentioned, industry-leading growth, which we expect to continue in Q3 and then a steady progress on adjusted EBITDA with awareness on a quarter-by-quarter basis of maybe some short-term things that we're aware of and managing.

Yes. I'd probably just add, Joe, we did talk about acquiring these better cohorts and near-term EBITDA is actually a little bit intention with that. The cohort payback improves over time. So when we look at, for example, 2021 cohort, the value of those surviving customers is materially higher over time. So the value lands many quarters after you've acquired them. So to your EBITDA question, really, you've seen our marketing go up as a percent of revenue from 13.5%, 14% to 17% to 19%. So that explains the -- not a move in EBITDA in the immediate term. But over time, we see that our expectation is these cohorts are performing better initially and that will convert to EBITDA down the road.

Okay. And then my last question, I mean, we're seeing your balance sheet improves -- it's in the best sheet it's been. In the past, you have alluded to M&A as being perhaps a way to deploy capital. I was wondering if M&A is still on your radar.

We've continued to look at a number of different opportunities, but none that has connected so far. So we'll keep looking and find things that are created for shareholders.

Your next question comes from Gianluca Tucci from Haywood Securities.

I'm wondering guys, congrats on a nice print. If I could just ask on CapEx. It looks like you spent over $1 million in the quarter and have commitments to spend almost $3 million more. Can you impact that for us? Is it going into equipment to support higher volumes in the lab? Any color there would be helpful, guys.

Gianluca great question. We did spend some CapEx earlier in H1 and related to supporting our lab as well. I think you've been to the [indiscernible] so some of that CapEx went to our retail. And overall, we do have some small commitments for the rest of the year. But overall, we're on track to hold similar to 2023, '24 and '25 CapEx to be sub 2% as we continue to invest in our operations.

Okay. And if I could just ask 1 question on glasses. So it scaled from 14 to almost 20 now, like looking forward 12 months, how do you see that percentage of sales evolving? Like should it be in the low 20s next year? Just, Roger, how are you thinking about how the glass is a business evolves as a percentage of overall revenue. Congrats again.

Yes. Thanks, Gianluca. How we're thinking about glasses you're right, it has become almost 20% of the business. nearing a $50 million run rate. So it's a real business at this point. Margins continue to be very healthy. Return rates, as we talked about, customers returning are quite strong. The cohort spend is high. So it's still early, but we're running the same playbook that's built our contact lens business, which is lean on our vertical integration lean on a frictionless entry pricing and then offer customers a premiumization. So you saw premium lens upgrades are over 40% of Glass' revenue. Our digital progressives are growing 65% plus returning customers now making up a growing majority of glass disorders. So there's a ton of momentum in that business, and it's really just a balance as we go forward this year to continue to invest at the right rate, continue to secure the best customers. And we're very optimistic about where that glasses business is going. It remains very, very early in this large category. Thank you, Gianluca.

Your next question comes from Frederic Tremblay from Desjardins Capital Markets.

I wanted to ask on the premium lens upgrades that represented over 45% of glasses revenue in the quarter. Just wanted to get your thoughts on how much runway there is left in that product category? And if you could provide a rough indication of the margin benefits of getting those land upgrades. That would be great.

Fred. And I think -- thanks for the question. I think we see a lot of runway ahead. I think we're -- as Roger said, we're very early days. Some of the stars in Q2 were digital progressive lenses and the introduction of our anti-fatigue lens, which is a premium lens package on single vision also eligible on Progressive. And so we expect both of these areas as well as thinner lens, photochromatic, Sun Rx to continue to expand. And then importantly, we expect to launch new areas of premium lenses. So for our team, I think we view this as so very much even in the first inning of the -- of our expansion in in glasses and on the premium lenses. And so on the gross margin side, we did see these premium glasses cohorts coming in and positively impacting gross margin, which you saw in the numbers. And that's exciting and gave the team even more confidence on what's to come in the back half of the year and in 2027 and beyond.

Great. And just my last question. On pricing relative to the fuel surcharges that you're absorbing now, was the decision to keep pricing stable? Was that a deliberate to provide frictionless entering into the products? Or is there anything from a competitive perspective that's leading you to raise prices at this point?

Sure, Fred. Maybe I'll start. And I think, really, I would just echo the comment, Roger made a few minutes ago. This is really as opposed to us looking around at the market, this is really us looking internally on our vision to make eye care easy and to offer customers the best value. And so -- so we do see occasional surcharges come across our business. And in this instance, as Ibrahim mentioned before and in many instances, we made the deliberate choice not to pass that increase through to the customer. Instead, we're managing this directly with our carrier partners and absorbing it within a broader fulfillment efficiency. I know you appreciate this having walked through the lab and you see both the scale of the facility now and the benefits that scale will provide to us. as we continue to grow into that invested CapEx. And that fulfillment network that's been built over years. And so that really gives us the confidence to say, let's work together with our partners to keep costs down. And while we do that, let's not burden the customer. with surcharges in this moment. Let's continue to acquire the customers that we are acquiring. And we know that, that trust will be repaid to us with continued performance on the repeat cohorts for years to come.