The Tax-Free Savings Account (TFSA) is a popular registered account in Canada due to its tax-sheltered status. Any returns generated in a TFSA from qualified investments are exempt from Canada Revenue Agency taxes, making it an ideal choice for investors with a sizable risk appetite.
For instance, Canadian investors should consider owning quality growth stocks in the TFSA to derive market-beating returns over time. In this article, I have identified one such Canadian stock that should be part of your TFSA right now.
The bull case for this TSX stock
Valued at $575 million by market cap, Kits Eyecare (TSX:KITS) operates a digital eyecare platform in the United States and Canada. It is a vertically integrated digital eyewear brand that offers an extensive range of eyeglasses, sunglasses, contact lenses, and vision care products.
KITS aims to revolutionize the eyewear industry by providing a seamless online shopping experience, fast delivery, and exceptional customer care. The TSX stock went public in early 2021 and has since doubled shareholder returns.
Kits Eyecare delivered record revenue of $49.6 million in Q2, representing a 31% year-over-year increase. It reported an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $2.6 million, indicating a margin of 5.2%. It was the company’s 11th consecutive quarter of positive adjusted EBITDA. The standout performer was the eyeglasses business, which grew 44% year-over-year to $7.2 million in sales.
Kits delivered over 112,000 pairs of glasses during the quarter, representing a 53% increase from the prior year. Premium lens upgrades accounted for nearly 46% of glasses revenue and grew by 58% year-over-year, indicating that customers are increasingly choosing higher-value products. Returning customers now represent over 52,000 glasses deliveries, up 18% year-over-year.
Growth driven by AI and repeat business
Revenue originating from Canada increased by 44%, driven by new and returning customers across various product categories. Management noted this growth came despite Kits still having minimal market presence and brand awareness in most Canadian regions, suggesting a significant runway ahead.
The company added a record 111,000 new customers during the quarter, up 55% year-over-year, bringing the two-year active customer base to over 991,000 people. New customers contributed over 39% of revenue. To support this growth, marketing spend increased to 15.2% of revenue from 13.4% the previous year, reflecting strategic investments in customer acquisition programs, such as “first pair free” promotions.
Gross margins expanded 350 basis points year-over-year to 36.3%, benefiting from a higher glasses mix and improved operational efficiency. Management reiterated its long-term target of reaching 45% gross margins within three to five years, with adjusted EBITDA margins eventually reaching 15% to 20%.
Kits also launched OpticianAI during the quarter, a tool that helps customers select frames based on their unique measurements, prescription, and style preferences. Early feedback suggests customers view the online experience as superior to traditional retail for frame fitting.
For the third quarter, Kits expects revenue to be between $52 million and $54 million, with adjusted EBITDA margins of 5% to 7%, implying continued momentum in both growth and profitability.
Is the TSX stock undervalued?
Analysts tracking KITS stock forecast sales to rise from $159.3 million in 2024 to $356.6 million in 2027. Comparatively, adjusted earnings per share are estimated to expand from $0.04 to $0.48 in this period.
Moreover, free cash flow is projected to improve from $10 million in 2024 to $30 million in 2027. If the TSX stock is priced at 35 times forward FCF, it should double over the next 18 months.
