E-commerce stocks cooled down considerably in 2022. PetMed Express (PETS -2.00%) is not unique among this cohort in that it slumped about 40% from its previous highs in 2022. However, while many of these stocks were unprofitable or trading at sky-high multiples, PetMed Express is profitable, trades at a reasonably modest valuation, and has plans to expand.

Further, PetMed Express is a bit of a rarity among e-commerce stocks in that it pays a dividend. And this isn't just any dividend -- shares of PetMed Express yield nearly 7%. Let's take a closer look at the online pet pharmacy retailer and why it looks like an attractive buy for risk-tolerant investors moving forward. 

A golden retriever getting a checkup at a veterinary office.

Image source: Getty Images.

Turnaround time

PetMed Express is an online pet pharmacy that sells prescription and non-prescription pet medications and other products to U.S. pet owners for animals like dogs, cats, and horses.The Florida-based company has a customer base of about 2 million and an excellent net promoter score of 80, putting it in the world-class category for customer experience.

Unfortunately, the 26-year-old company has struggled in recent quarters. For example, last quarter, revenue fell 3% year over year while earnings per share decreased 28%. But the early stages of a turnaround may be underway. For example, management says that its "Autoship & Save" subscription sales are growing and now account for 39% of revenue (a 15% increase sequentially), which will help the company shift from one-off sales to a more attractive recurring revenue model.

PetMed Express is also working to expand beyond what it calls the $10 billion pet medication market and into the much larger $123 billion total pet market, with a focus on overall pet health and wellness.

New CEO Matthew Hulett says that the company's new vision is that "every pet deserves to live a long, happy and healthy life" and that to achieve this vision "PetMed is shifting from being simply a leading pet medication retailer to being the pet health experts, a market leader in pet healthcare expertise." If it's successful in expanding into this adjacent area, it could greatly increase the company's revenue and total addressable market.

The company is even wading into telemedicine for pets. Through its new Vet Live platform, PetMed Express can connect pet owners with thousands of licensed veterinarians any time of day or night. While this is still a nascent business, it could help PetMed Express differentiate itself from the competition and further increase customer loyalty.

The tail wagging the dog

PetMed Express is attractive for a number of additional reasons. The pet care business is resilient, as most people will continue to buy food, medicine, and other necessities for their pets even during an economic downturn.

Furthermore, the pet population in the U.S. has increased greatly since the COVID pandemic began. The American Society for the Prevention of Cruelty to Animals (ASPCA) says that 23 million Americans adopted pets during the pandemic. Hulett says that 70% of U.S. homes now have a pet.

These pets are also living longer, and that's thanks to advances in veterinary care and higher owner interest in wellness and nutrition. This larger pet population should be a long-term tailwind for an online pet retailer like PetMed Express.

Dividend and valuation

PetMed Express stands out in the e-commerce space by paying a significant dividend. Its yield of nearly 7% is far better than the market average or what an investor could get from a 10-year Treasury bill. PetMed Express has paid a dividend consistently since 2009, and it has grown its annual dividend payout for 13 years in a row.

One cause for concern that should be noted is that the dividend doesn't look like it's on the most stable ground from a dividend coverage perspective. The dividend payout ratio is currently over 100%, meaning that the company is paying out more in dividends than it is earning.

However, PetMed Express does have a significant amount of cash, which it could theoretically use to support the dividend until earnings increase. While free cash flow can be a better indicator for evaluating a dividend's safety, the company's free cash flow has fluctuated in recent times.

In any case, it is a situation worth monitoring going forward. While I love the yield and track record here, I have to acknowledge that this likely isn't the most rock-solid dividend out there at the moment. 

At 18 times forward earnings, valuation is also a tad higher than the average multiple for the S&P 500, but by no means prohibitive. The company has a strong balance sheet, with no long-term debt and $97 million of cash as of last quarter.

Looking ahead

With a reasonable valuation, strong balance sheet, and attractive dividend yield, PetMed Express looks like an interesting buy for risk-tolerant investors as it continues to make progress on the early stages of its new strategy.

Because of the company's great reputation with customers, as evidenced by its top-notch net promoter score, it seems reasonable that it can successfully enter the larger overall pet market, which would give it a long runway of growth ahead.