PetMeds Moves Up On Mixed Results
Shares of PetMeds (NASDAQ: PETS) are rocketing higher in the wake of what we can only call a mixed report. The news wasn’t bad and it wasn’t good and it certainly isn’t enough to have shares up by 9%, not unless you factor in the short interest. The short interest was over 21% at the start of the month which is quite a weight for share prices and part of why they have been trending lower over the past several quarters. It is our guess that there is some short-covering going on right now and that this pop in prices is being used by the bears to full advantage because it is so far behind its competitors it may never catch up.
PetMeds made its name as PetMed Express, an eCommerce delivery service specializing in pet medicine delivery. The concept was good enough to get the company in business but has come under pressure in recent years. No few competitors have emerged including Chewy.com and they are all better. Where PetMed Express operated like an online veterinary clinic its competitors did not. PetMed Express's offerings were as limited as the vet's office and when compared to online stores that combine the best of full-blown pet retail with vet and pharma it was a no-brainer for consumers. Now, PetMeds is trying to combat steadily declining revenue and earnings by making the switch to a more comprehensive pet health concept and it may not work, even with positive trends supporting the broader pet care market.
PetMeds Has Mixed Quarter On Declining Revenue
PetMeds has seen its revenue decline for 9 of the last 13 quarters and the 4 quarters that saw growth were pandemically-boosted so they don’t count. Since the height of the pandemic, the company’s revenue has dwindled nearly 40% to a mere $66 million This is down 7.9% YOY and more in the 2-year comparison and missed the Marketbeat.com consensus by $2.13 million or about 300 basis points. Moving down to the earnings, the news is equally mixed with gross margin improving by 80 basis points but operating margin contracting by 100. This left the GAAP earnings down 11% YOY and EPS at $0.30. The good news is that margin came in a little better than expected and EPS beat by $0.02 but that’s not enough for us to get excited. What we want to see is traction and momentum in the new strategy.
The part of this story that is the most concerning to us is the dividend. The dividend is attractive at a 5.77% yield and the company says it is committed to paying a dividend but there is risk in this picture. The payout ratio on a TTM basis is above 100% and the outlook for this year is not any better. The balance sheet is still in good shape but cash is declining and will fall further if business and/or profitability don’t pick up. What we see is happening, however, is a distribution cut and it may be a big one.
The Technical Outlook: PetMeds Pops But We’re Not Buying It
Price action in PetMeds popped more than 9.0% following the Q4 release but, as we said, this move is more to do with short selling and short-covering than anything else. In our view, price action is facing stiff resistance at the $24 that will be compounded by the short-term EMA. If the stock can get above those levels a reversal may be in order, until then this stock is still in a downtrend and one that we think will see a new low.