PetMed Express Inc. (PETS, Financial) is a leading nationwide pet pharmacy and Vet-VIPPS accredited, delivering prescription and non-prescription medications, and pet supplies. Operating as 1-800-PetMeds toll free number and through Internet as well, the company sells its products around the U.S., with a product line containing approximately 750 SKUs for dogs, cats, and horses. It offers two types of products: Non-prescription medications, which include flea and tick control, bone and joint care, vitamins, nutritional supplements, and hygiene products, and Prescription medications, which include heartworm treatments, thyroid and arthritis medications and antibiotics in addition to other specialty medications as well as generic substitutes.
The company has created an “Exam Reminder Program,” helping pet owners remember to take regularly their pets to veterinary appointments. Through these reminders pet owner compliance with their veterinarians’ medical recommendations is increased, helping pets live longer. Eddie Khoriaty, 1-800-PetMeds Prescription Department Manager said: “The pharmacists here at 1-800-PetMeds feel strongly that the best thing pet owners can do for the well-being of their pets is to develop and maintain a strong relationship with their veterinarians.” In addition, educational outlets are provided by the company along with a Vet Directory on their site, to help find veterinarians within different areas.
Results for third quarter of fiscal 2014 were in line with estimations, with revenues growing 1% year over year to $50.1 million and EPS of $0.23. Net sales in the quarter increased 1.0% year over year to $50.1 million, driven by string reorder sales, up 3.6% year over year, but were still below estimated figure of 4%. The company faces competitive pressure in the pet medication market, and increasing product costs and discounts have laid huge pressure on margin.
Three Strong Points
PetMed has successfully reported another improvement in sales, with a 3.6% increase in reorder sales, overcoming the drop on sales produced by the unavailability of Novartis AG (NVS, Financial)’s products. Striving to expand product portfolio in order to drive the top line and shift customers from the Novartis brand, PetMed is improving new order sales along with shifting to high-margin items. Marketing campaigns have been successful, pushing sales via the Internet. Customers have responded positively to promotions, rising average order size to $72 in the quarter. Furthermore, the company has done some important efforts regarding limited consumer spending, changing product mix to lower-priced items, while expanding its product offerings.
Another positive outcome for the company has been the widening or product portfolio. Offering a wide range of products for dogs, cats, and horses, it markets its products primarily under well-known brands of medication such as Frontline Plus, K9 Advantix, Advantage, Heartgard Plus, Sentinel, and Interceptor among others.
Regarding the company’s financials, it has had steady strong results, being able to reward shareholders by dividends and buybacks. With cash flow from operations reaching $17.7 million, compared to $21.8 million for the same period, PetMed’s board declared a quarterly dividend of $0.17 per share with Nov 22 as the payment date. Expanding product offerings and focusing on increasing its advertising spending are likely to boost sales in the next quarters.
The Pet Industry
Increasing product costs and discounts have indeed hurt the company’s gross margin, contracting it 98 basis points year over year during the last quarter to 33.7$. Moreover, Novartis AG (NVS, Financial) announced during 2012 that it was ceasing to produce animal health products, including brands like Sentinel and Clomicalm. Of course this interruption of products affected the industry and led to a decline in average order value and a change in product mix to lower-margin items. Nevertheless, the company managed to prescribe alternative brands and generic products, but still no permanent solution is on sight. The competitive environment within this industry has made PetMed adopt a more aggressive pricing strategy that has however affected its gross margins. Competition is increasing with competitors that include veterinarians, traditional retailers, other retailers.
Final Thoughts
PetMed reported earnings per share in line with estimations for Q3 2014, and has had an overall conventional performance. Still, the fact that is has been able to overcome the decay in sales produced by the Novartis brand shortage, and moreover increase sales, is indeed positive signs for the company. Focusing on advertising to improve sales and shifting sales to higher margin items are part of the company’s strive to push top line further up. Despite these improvements nevertheless the company faces competitive pressure and the fragmented pet medication market is still rather uncertain regarding consumer’s spending. Analysts are thinking this stock is a Hold, as the innovations and investments are still to develop results in the near term.
Disclosure: James Miller holds no position in any of the stocks mentioned.
