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Why PetIQ Stock Tanked on Friday

By Jon Quast - Aug 7, 2020 at 12:26PM

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The company achieved record revenue in the second quarter, but is guiding for declines.

What happened

Shares of PetIQ (PETQ -1.11%) fell Friday after the company delivered its second-quarter results. Revenue hit a new record high and comments from management sounded positive, but the company also issued guidance predicting a drop in revenue in the third quarter, which didn't sit well with investors. As of 1:20 p.m. EDT, the stock was down more than 16%.

Perhaps traders didn't need much of an excuse to sell -- they can get antsy when a stock is up big, and PetIQ stock was trading near its 52-week high after more than doubling from the all-time low it touched in March. 

PETQ Chart

PETQ data by YCharts

So what

PetIQ has two operating segments: products and services. In products, it manufactures pet products for retail sales. In services, it operates veterinary clinics and sells its products directly to customers. Product revenue held up fine in Q2 as sales rose 36% year over year to $264 million, helped by recent acquisitions. People remain committed to keeping their pets healthy even during a pandemic and a recession.

However, the services segment didn't fare as well -- revenue fell 90% from Q2 2019 as the company's wellness centers and veterinary clinics were forced to close during the COVID-19 shutdowns. As bad as this is, the big picture looked OK. Between the two segments, total quarterly revenue was up 21% to $267 million -- a record for the company.

The pandemic affected the bottom line as well. Between things like hazard pay and closed locations, as well as non-coronavirus issues such as acquisition costs, PetIQ swung from net income of $5.9 million in Q2 2019 to a net loss of $2 million in Q2 2020.

A red, upward arrow breaks at the top and starts to point down.

Image source: Getty Images.

Now what

Management said 60% of the company's wellness centers (permanent veterinary locations) had already reopened, and it plans to have 95% operating again by the end of the third quarter. Additionally, its community clinics (mobile vet services that operate with limited availability) are just starting to get going again. Management expects 95% of those to be running as normal by the end of Q3, too.

This being the case, one would expect guidance for growth in the current quarter. However, PetIQ is only forecasting net sales in the $160 million to $170 million range, which would be an 11% year-over-year decline at the midpoint. The implications of those mixed messages left investors concerned, which explains why the small-cap stock slid.

Longer term, investors will need to hope PetIQ's services segment returns to revenue growth. The company plans to be operating 1,000 wellness centers by the end of 2023, and their success will be a big part of any investing thesis for the stock. 

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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