PetMed Express (PETS -2.61%) is at the intersection of at least three hot emerging trends. Unfortunately for investors, Monday afternoon's earnings report was another head-on collision.
The direct seller of prescription and nonprescription pet medications and supplies through its 1-800-PetMeds phone line and website should be an obvious beneficiary of last year's pandemic-fueled spike in pet adoptions. PetMed Express should also be a beneficiary of consumers shifting to the convenience of home delivery over brick-and-mortar shopping trips. The third trend working in its favor is the humanization of pets. We're treating our canines and felines as if they're part of the family, and with that comes better attention to their health and wellness.
Unfortunately for PetMed Express investors, its fundamentals seem to have missed the memo. Results in this week's fiscal second-quarter report fell well short of Wall Street targets. Business is retreating in the most favorable of operating climates, and a push to expand into new markets seems dangerous when it can't master its own specialty.
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It's a dog-eat-dog world
Net sales for the quarter that ended last month clocked in at $67.4 million, 11% below the year-ago period. The comparison was going to be challenging since new pet owners were spending a lot of money last year in welcoming their fresh housemates, but isn't the appeal of pet adoptions as a bullish thesis that we'll be spending a lot of money to keep our canines and felines healthy every year?
Analysts were willing to give PetMed Express some wiggle room here. Wall Street pros figured that year-over-year sales would experience a 4% dip. It was a lot worse. Net sales actually were lower than they were in the fiscal second quarter of two years ago. In short, PetMed Express might be the only pet-related public company to be doing worse than it was before the pandemic boom.
The news doesn't get any better as we work our way down the income statement. Net income plummeted nearly 25% to $0.31 a share. Analysts were perched on a profit target of $0.34 a share. It's the third quarter in a row that PetMed Express fell short of Wall Street expectations on the bottom line.
PetMed Express has never been flashy. Fiscal 2009 is the last time that it posted double-digit growth in net sales. Instead, it's been clawing at the door of income investors with its flashy 4.4% yield. The board did declare the regular quarterly dividend of $0.30 a share, but it's barely earning enough to keep that going. PetMed Express has boosted its payout 10 times over the past 12 years, but the next move will likely be a cut if it's not able to get its bottom line growing again.
Instead of trying to figure out why it's losing market share in its core competency, PetMed Express is thinking bigger.
In Monday afternoon's earnings release, CEO Matt Hulett is quoted as saying, "PetMeds has been a pioneer in the business of pet health and wellness for over 25 years, and it's time to take the next step toward expanding our business in the $10 billion pet medication market and to begin our foray into the much larger $107 billion total pet care market."
It's a big bet, and it's probably going to weigh on the bottom line (and possibly its dividend) in the near term if it's serious about getting it right. Its new AutoShip & Save program is ripped from the Chewy and Amazon playbooks, as those two larger e-commerce leaders have subscription-based discounts for folks who sign up for automated orders at selected intervals. The name of the new program is even lifting a bit of each bellwether's offering, as Chewy calls its program Autoship and Amazon rolls with Subscribe & Save.
You can't knock PetMed Express for that. If you're going to copy someone, you may as well crib from a business that is posting consistent double-digit growth -- something that PetMed Express hasn't done in a dozen years. For now, it's hard to be excited about PetMed Express until it proves it can regain its organic growth and keep the quarterly payouts going.
