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PetMed Express, Inc. (NASDAQ:PETS) has been deciding what type of company it is, as it works on transitioning from a company focusing on serving the seasonal pet prescription market, to one that targets the entire health of pets.
One way to look at it would be to use us humans as an example, where taking care of our health isn’t just treating the symptoms of a disease or condition but engaging in a lifestyle that helps prevent or resist a disease before it happens.
Generally, that is the major change PETS management is taking, and as evidenced by its share price, it’s only in the early stages of the process, but if it can execute on its strategy and plans, it’s positioning itself for the chance at becoming a growth and income stock in the years ahead.
As for the share price of the company, after it hit almost $43.00 per share in mid-July 2020, it continued to drop to about $19.00 per share in mid-May 2022 and has seemed to find a bottom at the price point through the end of November 2022. Since finding what appears to be a bottom, it has moved consistently in a range of $19.00 per share to approximately $22.40 per share, with a very brief stint on either side of the average.
In this article we’ll look at the latest earnings numbers, what they imply, the strengths I see in some of its initiatives, and why it’s in the company’s hands to successfully execute on its vision if it wants to break out of its current trading range and be considered a stock that can deliver both growth and income on a consistent basis over the long term.
Latest numbers
Revenue in its second fiscal quarter of 2023 was $65.4 million, down 3 percent from $67.4 million in revenue generated in the second fiscal quarter of 2022. For the six-month period through September 30, 2022, PETS generated revenue of $136 million, down from revenue of $147 million in the first six months of 2021.
On the revenue side, management said the reason for revenue stabilizing was the ongoing growth of its AutoShip & Save subscription sales, which were up to 39 percent of total sales in the quarter, compared to 34 percent of total sales in the previous quarter.
Net income in the reporting period came in at $2.6 million, or $0.13 per share, compared to net income of $6.3 million, or $0.31 per share year-over-year. Net income for the first six months of fiscal 2022 was $5.4 million, about half of the $10.8 million in net income from the prior year in the same period.
Adjusted EBITDA in the quarter was $7.1 million, down 28 percent from adjusted EBITDA of $9.8 million in the same quarter of 2021.
Gross profit in the second fiscal quarter was $18.4 million, down from the $19.2 million in gross profit in the same quarter last year. For the first six month of fiscal 2023 the company had gross profit of $38 million, compared to a gross profit of $41 million in the first six months of fiscal 2022.
Cash and cash equivalents at the end of the quarter were $97 million, compared to the $111 million at the end of March 2022. The company has no debt as of the end of the reporting period.
As for the next couple of quarters, because its Rx sales are primarily for fleas, heartworms and ticks, the performance of the company will probably pull back some until weather warms up more. It’ll continue to be subject to seasonality until it successfully transitions to its new business model.
New business model
There are a couple of things I want to focus on in this section of the article. One is the company migrating to build out a subscription model while lowering its direct-to-consumer model. That will provide a more balanced revenue stream throughout the year rather than rely primarily on seasonal sales in the flea, heartworm and tick market.
The other is the new business model itself, which is to move from being a dealer for pet medications and positioning itself as “pet health experts.”
What that means practically is its going to compete in the $48 billion pet consumables market, where it plans on adding quality brand names and their products to an expanding catalog for pet owners to choose from. That would more than double its $35 billion market in pet Rx.
In order to mitigate customer churn, the company is also planning on adding “more virtual care and wellness services that will contribute to loyalty” while differentiating it from its competitors.
Two unknowns
There are two major things I see that have yet to be proven in regard to the company succeeding in its new strategy.
The first and most obvious is the fact it has a new management team in charge. There is no way of knowing how they’ll perform now that they’re in the driver’s seat.
I like the vision they have, which is very clear and easy to understand, and which I think has a good chance of succeeding. But there-in lies the problem. It’s one thing to develop a plan and strategy that looks good on paper, it’s quite another to execute on that plan, which is the second major thing investors should consider when evaluating the company.
They’ve taken the first step in designing a plan; something that had to be in place before the company looks at the best ways to execute on that plan.
Now that this is where things are at, it’s a matter of sitting back and watching how the company performs. Now we’ll see if it can transition from blueprints to building a consistent revenue stream at a profit.
Conclusion
Its Rx business should continue to perform well, and as it gets more subscription customers as the company increases the number of offerings on the pet consumables side of the business, we’ll start to get a look at whether or not customers respond to the increasing number of products offered by the company outside of Rx.
If consumers consider it a place to get most of their pet needs and wants met, it could be a significant catalyst that could give the company the growth momentum it has lacked for so long.
That said, I do think the next couple of quarters, based upon its Rx business demand, is going to be slow, so it may take a while before we get enough feedback from the data to know how the new business model is working.
I’m drawing that conclusion from the fact there will be less visits to the website for Rx products, and so it could slow down the pace of growth from the lack of customers finding the new products in its catalog.
I like the general vision laid out by the company for its path to sustainable growth, but in the end it has yet to prove it can execute on that plan, or even if the new model is a solution the pet market is looking for.
The pieces are now in place and it’s only a matter of time before investors find out if the company has made the right decisions. Until then, I think the company is likely to underperform in the next couple of quarters based upon doing its seasonal business as usual in the Rx market, while investors look for how it progresses in its expanding consumable product catalog.
Any surprise on either side of its performance will likely move its share price in a significant way. We simply don’t know whether it’ll be up or down as the company stands today.
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