Is It Time To Sell Petmed Express?

Petmed Express Revenue Falls Short

Petmed Express (PETS) reported earnings for the 4th quarter this morning and shares are moving lower because of it. Down -2.0% in the premarket and -6.0% shortly after the open, the charts don’t look good. Price action is confirming a top at the $27.50 level that could spell doom for the stock’s value over the next few weeks and months.

The expectation for Petmed Express was very high going into the report. The online pet supply company wasn’t expected to produce much growth but trends in online sales and petcare suggest tailwinds are present. Digital sales are growing at double-digit rates for most businesses pursuing the direct-to-consumer approach. Even Amazon (AMZN) , who is competing with a growing number of online retailers, is still posting solid sales growth every quarter.

Add to that trends within the pet care industry itself. Petcare is supported by a double-tailwind of increased pet ownership and improving standards of living for U.S. pets. The U.S. pet care market is worth $75.4 billion this year and expected to grow at a 3.5% CAGR over the next five years. The global market is estimated at $135 billion and expected to grow at a near 5% clip over the next five years. There is a tailwind so what happened with Petmed Express?

What Happened With Petmed Express

Petmed Express reported GAAP EPS of $0.34 and beat the market consensus. The problem is a slight miss on the revenue end, just over 2.3%, and a growing chance the dividend will be cut. Revenue came in at $59.2 million, down -0.2% from last year and within the margin of error ie the company should have posted near 2.0% revenue growth.

Other negatives within the report include declines in net income (down -12%), EPS (down -10%), and cash-flow from operations (down -32%). Margins improved but that news was little balm for markets worried about the dividend. The payout ratio is already running high at just under 90% making it a primary target for directors and management looking to free up cash flow in future quarters.

Menderes Akdag, CEO and President, commented

“In 2020, we will focus on optimizing our marketing in this more competitive environment and being more efficient with our advertising spending. In addition, we will continue investing in our e-commerce platform to better service our customers.”

Chewy Is A Force For Petmed Express To Reckon With

Chewy Inc (CHWY) is the online subsidiary of Petsmart Inc and firing on all cylinders. The difference between Chewy and Petmed Express is akin to the difference between the vet’s office and the pet store. Where the vet (Petmed Express) offers some food, some leashes, and some other supplies alongside medicines the pet store (Chewy Inc) has a much wider selection.

Chewy has already forced Petmed Express to cut prices; when it comes to consumers’ choice is king and the winner in this battle will be Chewy.

Chewy only IPO’d this year and has yet to produce consistent profits but that doesn’t matter. Analysts at Credit Suisse are confident revenue momentum will translate into profits once the company’s aggressive growth phase is over. Trading at only 1.6X the 2020 EV/sales estimate Chewy is significantly undervalued relative to its peers. The broader pet care segment is trading near 3.4X is EV/sales value while petcare IT is trading closer to 3.7X.

Is It Time To Sell Petmed Express?

Based on the charts and increased competition from Chewy Inc it may be time to sell this stock. Or at least to cut exposure and add a little Chewy to the portfolio. At current price levels, it looks like resistance is pretty strong in the $26 to $27.50 range but there is a caveat. This candle is not completed so it could and will change before the close.

The bad news is that resistance and downward price action are also indicated by MACD and stochastic so I would expect to see support tested thoroughly before any rebound can form. Support is at the short-term moving average right now, a move below that level would be very bearish. The next target for support after the 30-day EMA is the $22 level, if that breaks $20 looks like a possible target.