After a Post-Earnings Drop, is it Time to Ride PetMed Express?

This week PetMed Express (NASDAQ:PETS) reported fiscal third quarter results that were less than 'purrfect'. In response, the stock dipped back below $30 following an optimistic runup to the announcement.

With the retailer of pharmaceuticals for the pet industry now in the market's doghouse, investors have an opportunity to reassess the merits of a unique play on the increasingly popular pet theme. Is the recent dip a signal of a fundamental derailment or an opportunity to climb aboard PetMed Express?

How did PetMed Express Perform Last Quarter?

PetMed Express, the company behind 1-800-PETMEDS, announced a 10% increase in sales to $65.9 million for the quarter that ended December 31^st. This beat the Street by about $2 million. Earnings per share of $0.38 were up 11% year-over-year but fell short of analyst expectations by a penny.

The market chose to zero in on the slight EPS shortfall selling out the stock in heavy volume in the two days that followed. But lost in the shuffle were some positive underlying results that point to a healthy business.

The average order ticked higher from $85 to $88 which showed that people are spending more on medications for their furry friends. This is an important metric in any retail-oriented business.

Also encouraging was a 12% increase in reorder sales which represented 91% of overall revenue. This level of reorder activity represents recurring revenue that should provide comfort to investors. It means PetMed's customers are loyal and serve as a solid base from which the company can grow.

Meanwhile, the balance sheet continues to look strong. The cash position increased sequentially to $106.5 million and with limited current liabilities the liquidity position is robust. PetMed Express also carries no long-term debt and offers a generous dividend.

What are the Growth Catalysts for PetMed Express?

Now in its 25^th anniversary, PetMed Express is the pioneer in pet pharmaceutical retailing. Part of why the market soured after the recent earnings report was because it expected growth comparable to that of pet retailers like Petco and Chewy like have benefitted from rising pet adoption and product demand during the pandemic.

But PetMed Express is a different animal. It is a specialty pet retailer focused on pet medications whose products typically experience more steady demand patterns. In other words, while pet owners are apt to stock up on pet food, they don't typically stock up on pet medicines, so each delivery is new and effective.

This makes repeat business an important element of PetMed's growth. The company's Loyalty Program is a major catalyst here and the engine behind the improving reorder trend. The program gives customers loyalty credits for past purchases which can be used on future purchases. This drives the type of repeat business that is so vital to PetMed's success.

But while hanging on to existing customers is important, to achieve the kind of growth that is going to catch investors' attention, PetMed Express will have to gather a litter of new customers. Discovering new ways to acquire customers is a key focus for management and progress on this front will be an important driver of the stock's 2021 performance.

Like any other Internet retailer, latching on to the rise in e-commerce activity will also go a long way in determining growth. Historically a telephone order business through its 1-800 service, PetMed Express has experienced increased traffic on its website and mobile app as the consumer trend in online shopping continues to accelerate. As a result, the company's is investing in its digital capabilities and adding new services to capitalize on these growth opportunities.

Is it a Good Time to Buy PetMed Express Stock?

The market's reaction to what was a decent quarter for PetMed Express was overkill. After all, the company did deliver double digit revenue and profit growth which was no easy feat during the unusual holiday quarter of 2020.

As a pet medicines retailer PetMed Express operates in a niche corner of the fast-growing pet industry. And since dogs, cats, horses and other animals need their meds just as much as we do, there will always be a need for pet pharmaceuticals. In this way, this stock should be viewed as a unique defensive play on a pet investment theme that has grown in popularity during the pandemic.

Although it operates in an increasingly competitive arena, PetMed Express has a leadership position. It has well-established relationships with pet pharmaceutical companies, veterinarians, and consumers offering a broad range of prescription and non-prescription medications at competitive prices.

According to the American Pet Products Association, Americans spent an estimated $99 billion on their pets last year roughly 30% of which went towards veterinary care and pharmaceuticals. With PetMed Express on pace for approximately $300 million in annual sales, the room for market share gains is substantial.

Bottom line, PetMed Express is a quality company that is in growth mode in an attractive industry. This along with its attractive 3.7% forward dividend yield makes it a compelling growth and income play on the pet trade. With the stock now almost 20% off its recent high and a going for a reasonable 20x earnings, it’s a good time to get on board the PetMed Express.