Coastal Contacts (COA $4.75) reported Q2 (April) results that were significantly below our expectation. The company is a leading provider of contact lenses and eyeglasses, sold over the Internet. Contact lenses account for 2/3 of revenues, but the greatest growth potential lies in the virtually untapped eyeglass segment. Contact lens sales slowed modestly from the immediately preceeding quarter. But that was a normal fluctuation influenced by re-order timing. The overall trend remains intact. Eyeglass sales, on the other hand, were much slower than anticipated. Pricing increased, an indication that promotional discounts were relied upon to a lesser extent. Even with that adjustment volume should have been considerably higher. Coastal Contacts raised $20 million in fresh equity earlier in the year. About 25% of that was spent in the April quarter to accelerate growth. It could be the extra spending will produce higher results in the current quarter. Demand is likely to be reinforced by a wider selection of brand name frames and sunglasses, and a more streamlined website. Coastal Contacts elected not to provide a sales forecast, though, so there remains considerable doubt about what the immediate future will bring.
The long term outlook remains positive. The on-line eyeglass category holds enormous potential. Even if only 10% of the eyeglass market goes to the Internet that business will equal the on-line contact lens industry. Coastal Contacts faces competition at the high and low ends. But the company remains the leader in the mid-range segment. Downside risk is limited by the company's acquisition potential.
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