Coastal Contacts ( Nasdaq - COA ) -- Deploys New Capital

Coastal Contacts (COA $5.75) appears on track to produce good Q2 (April) results.  Of greater importance, the company raised $18 million in fresh capital during the period.  Three million shares were sold at $6.00 apiece.  That money is being gradually deployed to support the company's penetration of the U.S. on-line eyeglass market.  The template for that business in Canada remains strong.  That operation has been in place for the past few years.  Selling eyeglasses on-line is challenge because new customers are wary of the process.  Once they do place orders, however, the far superior pricing drives repeat business and referrals.  Returning customers are accounting for an increasing share of Canadian orders, generating better margins.  At present the company is focusing on first time buyers in the United States.  As that base starts re-ordering margins promise to surge there, as well.

Large deals with health care insurance companies could amplify growth.  Coastal Contacts provides eyeglasses at approximately 50% lower cost than conventional retailers.  That's opening up opportunities among managed care providers that want to provide eye car insurance at low costs. 

The company's contact lens business continues to grow at a 5%-10% rate.  That segment had been starved for advertising funds before the recent stock offering.  Business in Northern Europe and Canada had held up well despite that lack of marketing effort.  Renewed spending promises to reinforce the company's competitive position in upcoming quarters.

In 4-5 years pretax margins could reach 20%-25%.  We project they will attain half that level by 2014-2015 as marketing costs continue to rise quickly, laying the groundwork for further sales improvements.  In 2-3 years sales could reach $325 million to provide fully taxed earnings of $.75 a share.  In 4-5 years income could hit $2.00 a share.

 

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