PetMed Express (PETS), which refers to itself as America's Largest Pet Pharmacy, is trading higher today (+19%) after reports Q2 (Sep) earnings this morning. In terms of quick background, PETS sells prescription and non-prescription pet medications and other health products for dogs and cats at competitive prices direct to the consumer through its 1-800-PetMeds toll free number and online. PETS markets its products through national television, online, and direct mail/print advertising campaigns. Generally, its prices are competitive with the prices for medications charged by veterinarians and retailers.
To be clear, the way to think about PETS is that it's more of a distributor of these products, not the manufacturer. In fact, many major pharmaceutical manufacturers have declined to sell pet medications directly to PETS. They would rather the meds be sold directly by the veterinarian to the consumer, 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.
Turning to today's earnings report, EPS rose 79% YoY to $0.43. Revenue rose 9.7% year/year to $66.7 mln. Both results were better than market expectations and the EPS upside was quite large. PETS says the trend over the last two quarters continued with increases in both new order and reorder sales during the quarter.
A big reason for the large EPS was upside was a nice increase in margins. Gross margin increased to 35.2% from 29.7% last year while operating margin in SepQ rose to 18.4% from 12.7% in the prior year period. PETS benefitted from a shift in sales to higher margin items in the flea, tick and heartworm categories.
It has been a bit of a roller coaster rise for the stock in recent months. It jumped in early May and late July on strong earnings but took a bit of a tumble in August on a negative report from the Aurelius Value website. PETS defended itself against the report, calling it defamatory and a self-serving attack by short sellers. But the stock did decline.
In sum, investors are clearly happy to see this SepQ report, which was quite bullish. The large expansion in margins was probably the most positive part of the report and came as a surprise. It seems to be getting investors to buy back into the stock.