PetMed Express: Hairball or haven for investors?
We love our animals, be they dogs, cats, gerbils, iguanas, snakes or horses. But when they get sick, the owners are often facing an expensive proposition to make them well, especially if a chronic condition requiring regular medication sets in.
Industry studies have indicated that Americans spent more than $38 billion in 2006 on their pets, up 35% from 2001. While most of that goes to keeping them happy, a growing amount is being spent on keeping them healthy.
A little more than a decade ago, the co-founders of what became PetMed Express Inc.(Nasdaq: PETS) established the company as a way for consumers to take advantage of a mail-order prescription service. The company offered economies of scale while providing customers the same drugs that they could get through their local veterinarian for their dogs, cats and horses.
Perhaps not surprisingly, the Pompano Beach, Fla., company – better known as 1-800-PETMEDS from its TV commercials and website – met with resistance from the veterinary community and drugmakers. The situation was similar to that originally faced on the human side of the prescription medication business, when mail-order and then Internet ordering began coming into vogue.
Let’s not pussyfoot around: The company, which bills itself as America’s largest pet pharmacy, has had some rocky periods. So are investors barking up the wrong tree on buying this stock?
After reporting strong fiscal-year and fourth-quarter results on May 14, shares jumped 13%. A quarter earlier, when turning in disappointing results of flat profits and rising costs, investors acted like they had swallowed a hairball and coughed up shares by about the same amount.
The stock has stayed around $12-$14, after tumbling from close to $20 in the spring of 2006.
The purveyor of flea repellant and hoof medicine showed fourth-quarter net income rose 16%, while quarterly sales grew 24% to $36.4 million. Earnings per share of $0.15 beat the Thomson Financial consensus estimate of surveyed analysts by a penny for the final quarter of fiscal 2007.
During the quarter, the company acquired about 132,000 new customers, and new-order sales jumped 40%. Advertising costs to acquire new customers, the fly in the ointment the prior quarter, slipped by 17% to an average of $34, from $41 in the December quarter.
What also might have triggered the positive changes included a new spokeswoman for the company, actress and friend of animals Betty White. Said PetMed Express President and CEO Mendo Akdag, who has been running the show since 2001, in a press release accompanying the results: “Our new advertising campaign featuring America’s Sweetheart Betty White, which started in January 2007, was instrumental in decreasing the advertising cost to acquire a new customer by 17%. … Our focus in fiscal 2008 will be on capturing additional market share, and improving reorders and our customer service levels.”
In the past year, the company has gained some strong accolades. It was ranked 27th on BusinessWeek’s 2006 list of hot growth companies (it was No. 1 on the 2004 list but missed the cut for 2007). Forbes placed it fourth on its list of the best small companies. It was added to the Standard & Poor’s Small-Cap 600.
Then there’s the notoriety. A story last September in Barron’s suggested the company has some “skeletons” in its closet. Dr. Marc Puleo, the co-founder, resigned as chairman in the summer of 2006. The article said that he and the other co-founder, Yali Golan, have been embroiled in a legal dispute over who came up with the idea for the company, and pay issues. Golan, it seems, was convicted in the early 1990s on drug-conspiracy charges and served 2½ years in prison. Golan, who also founded Lens Express in the 1980s, claims he came up with the idea of selling pet medicines by mail order. Golan’s name, the story indicated, has practically been expunged from the history of PetMed Express, which was added to the lawsuit between the two men in 2006.
In 2006, the company also settled with the state of Texas, which claimed that although it was licensed to operate in the state, it was “dispensing to patients in Texas without a valid practitioner/client/patient relationship.” PetMed paid a $50,000 penalty.
Despite the distractions, with Akdag in charge, revenue has risen from $10 million in $2001 to $137.6 million in the most recent fiscal year – and a year-over-year increase of 18%. Still, the stock has suffered, despite the announcement in November 2006 that PetMed Express would buy back $20 million of its shares in an attempt to increase investors’ value.
Analysts are somewhat torn about the company, seemingly scratching their heads – for guidance, not necessarily for fleas or lice. Back in January, First Albany’s William Lennan upgraded PetMed Express to neutral from underperform, citing the stock buyback program. He targeted long-term EPS growth of 10% to 15%.
More recently, ahead of the year-end results, Piper Jaffray’s Michael Cox downgraded the company to market perform from outperform, citing the growing competitive threat to growth from direct-to-consumer delivery options that are becoming available through veterinarians. On May 21, Matrix USA’s Daniel Scalzi downgraded his opinion to hold from a buy. Following the release of the financials, Kristine Koerber of JMP Securities reiterated a market outperform rating, but upped the target price to $14.
Most of the competitors of PetMed Express are privately held – such as Drs. Foster & Smith Inc., KV Vet Supply Co. and PetCareRx – so it’s difficult to decide which one is best of breed. As Piper Jaffray’s Cox noted, consumers do have other options available to them, and just as they trust their doctor, they’re likely to follow the advice that their vet offers on prescription sources.
On the most recent conference call discussing the results, Akdag said the company is not concerned with veterinarians steering customers to another medicine source.
Akdag said average order size in the fourth quarter was flat at $81, but the fiscal 2007 average was $79, up from $77 in fiscal 2006. “So we’re going to attempt to up-sell and cross-sell to slightly increase the average order size,” he explained.
PetMed Express still could be the catnip that some investors’ portfolios need.
