PetMed Express: Unleashing the pet economy
A recent cover story on the “Pet Economy” in BusinessWeek reported that Americans spend some $41 billion a year on their pets – more than they spend on movies, video games, and recorded music combined. Nearly half of that, according to the magazine, goes for veterinary care and medication. Pet spending may rise to $52 billion annually in the next two years – an increase of nearly 27%.
Figures like these make the country’s largest pet pharmacy, PetMed Express Inc. (Nasdaq: PETS), worth a closer look. The Pompano, Fla.-based company sells discount medication by mail through its 1-800-PetMeds toll-free number, website and direct mail campaigns.
Here are four reasons you should consider PetMed Express:
- It is the largest pet pharmacy and only significant discount mail-order pet pharmacy as the pet business registers double-digit growth rates.
- It has managed to source its product as it maintains an uneasy relationship with its main competitor – the fragmented veterinary practice market.
- It is recording significant internal growth in sales and profit as it increases advertising efficiency, adds new clients, boosts reorders, and upgrades service and IT.
- It has no debt and a huge cash reserve it is using to buy back its own stock.
While it seems like a surefire idea given the burgeoning pet economy, PetMed has actually had a tough time because it undercuts veterinarian sales of drugs, an important source of income for pet doctor practices. For a while, veterinarians refused to write prescriptions for the mail-order pharmacy and the company ran afoul of authorities for having alternative vets online write prescriptions without examining the pet (something not unheard of in human medication). Some of the bigger drug companies even refuse to sell directly to PetMed to avoid alienating vets, who account for a good two-thirds of pet drug sales. However, PetMed has managed to source its products through wholesalers.
For over-the-counter health products, like flea and tic treatments, PetMed competes with the huge brick-and-mortar pet supply chains PetSmart (Nasdaq: PETM) and Petco, as well as discount chains like Wal-Mart Inc. (NYSE: WMT).
However, PetMed recently trimmed its product line, took a more conciliatory stance toward veterinarians, emphasized convenience and service as well as price, and has seen sales grow from $10 million in 2001 to $162 million in fiscal 2007, ended March 31. Net income in fiscal 2007 was up 20% from the previous year, to $14.4 million, or $0.60 diluted per share.
The company handily beat earnings estimates for the first quarter of fiscal 2008, ended June 30, posting $0.25 a share compared with a forecast of $0.22. For the current quarter, ending September. 30, analysts are expecting $0.16 a share, versus $0.14. For fiscal 2008, the forecast is for $0.73, against $0.60. On the revenue side, analysts expect the company to increase sales by 17% in fiscal 2008, to $190 million.
Among analysts who follow the company, the stock has one “strong buy,” two “buys,” and three “holds,” with a median target of $16. Watch for updates, however: on Tuesday PetMed established a new 52-week high of $15.79 before closing 3.5% higher at $15.54, giving a market cap of $377 million. The 52-week low was $10.78 on May 8.
PetMed Express, which does business as 1-800-PetMeds, sells prescription and non-prescription medications for dogs, cats and horses. Some of the non-prescription medications are flea and tick control products, bone and joint care products, vitamins and nutritional supplements, and hygiene products. The main prescription medications are heartworm treatments, thyroid and arthritis medications, antibiotics, and other specialty medications, as well as generic substitutes.
In addition to beating earnings estimates in the quarter just completed, PetMed showed a strong increase in reorders – up 18% to $40 million, as overall sales rose 16.5% to $59 million – and increased efficiency in advertising, spending $36 to acquire a new customer, against $40 in the year-ago quarter. The company has attributed the increased efficiency, already evident in the fiscal 2007 fourth quarter, to the campaign featuring animal advocate and “Golden Girl” star Betty White in its TV commercials.
All this helped the stock gain 10% when quarterly results were announced July 23. Also on the positive side were the 26% increase in Internet sales to $37.9 million, representing 64% of total sales, against 59% in the year-ago period.
Two other parameters illustrate the growth dynamic: in the most recent quarter, PetMed acquired 236,000 new customers, compared with 207,000 in the year-ago period. In fiscal 2007, the company acquired 681,000 new customers, compared with 624,000 in the prior year. The average retail order in the first quarter of fiscal 2008 rose to $84, compared with $79 for fiscal 2007.
Looking ahead, the company is scheduled to migrate its website to a new platform this summer, which will give it much greater scalability and more room to personalize communications. Along with capturing additional market share, the company hopes to increase sales with personalized communication and greater health education content. It will also continue its recent strategy of adding staff in order to improve client service.
Last November, the company authorized a share repurchase program of up to $20 million. It repurchased 117,300 shares for approximately $1.5 million in the first quarter of fiscal 2008, and said it will continue to invest its cash – the company had $47 million in cash at the end of the quarter and no debt – in its buyback program.
If the growth rates in the “pet economy” turn out to be anything like what is forecast, PetMed would seem to have its own growth track mapped out.
