PetMed Express (PETS), which refers to itself as America's Largest Pet Pharmacy, is trading lower today (-5%) after it reported disappointing 4Q19 (Mar) earnings this morning. PETS focuses on selling pet medications, including both prescription and non-prescription meds, mostly for dogs and cats. PETS aims to sell its products at competitive prices, which are generally lower than what the local vet would charge. It sells direct to the consumer primarily through its website (85% of FY19 sales) but also has a 1-800-PetMeds toll free number.
PETS is the distributor of these products, not the manufacturer. Many major pharmaceutical manufacturers have declined to sell pet medications directly to PETS as they would rather the meds be sold directly by the veterinarian to the consumer. This is probably to have a trained vet explain the medication and, probably because they want to charge more money. As a result, PETS purchases many medications indirectly from secondary sources, including distributors.
The Q4 (Mar) results were not a good way to end the fiscal year. EPS fell 36% yr/yr to $0.32, which was well below market expectations. Revenue fell 4.1% yr/yr to $64.6 mln which also was worse than expected as analysts had been expecting some modest revenue growth. PETS did not provide guidance, which is usually the case.
PetMed Express has now posted back-to-back large EPS misses in DecQ and MarQ. The main problem PETS is facing is a higher level of online competition and more discounting going on. CEO Menderes Akdag said that "the online pet medication market continued to be more competitive during the quarter, which had a negative effect on our sales and gross margins."
When PETS started out in the mid-1990s, there were only a handful of non-vet options and its 1-800 number was its main sales channel. However, there are now lots of online options for pet meds, including Chewy.com, Petco.com, and Amazon. An advantage that Amazon has is the customer loyalty and free shipping it has built into its Prime offering. Plus, it's just easier if Amazon already has your info stored.
An interesting wrinkle in the story is that PETS pays a hefty dividend, currently at $0.27/sh per quarter. That computes to an annual yield of 5.3%. Its dividend is one of the main attractions for investors. However, given its recent struggles, we wonder if that will get cut at some point.
PETS has a history of steadily increasing its dividend and it did declare its usual $0.27 dividend today. PETS has a strong balance sheet with $100.5 mln in cash/inv, or $4.90 per share, with no long term debt. As such, the dividend seems safe in the near term, but that could change at any time.
In sum, investors are pretty disappointed with the MarQ results. The hope had been that the DecQ large EPS miss was an aberration, but back-to-back large EPS misses are setting off alarm bells. The online competitive threat is a big concern for investors and we are not entirely sure what PETS can do about it. It seems like it's going to continue to impact PETS' sales and margins in FY20.