PetMed Express, At The Nexus Of Three Trends
PetMed Express (NASDAQ:PETS), like its larger competitor Chewy, Inc (NYSE:CHWY), is well-positioned for the pandemic. As a 100% eCommerce play on pet care it is riding not one but three waves of growth; petcare with a mid-single-digit projected CAGR, eCommerce with its double-digit CAGR accelerated by stay-at-home trends. But there is a difference. These stocks are both riding the same trends but they are not the same investment story. Chewy.com is a non-dividend-paying high-growth story that is yet to produce a profit while Petmed Express is an established dividend-grower trading at a value to the market. I think they’re both great buys but today’s article is about PetMed Express.
PetMed Express Falls After Mixed Quarter
PetMed Express reported some mixed results for the quarter but only in comparison to the analyst’s estimates. The company’s top-line revenue came in at $75.44 million or up 7.9% from last year but missed the consensus by 2.0%. For the 6-months ended in September, the company’s revenue is up more than 14%.
What’s makes the miss so bad is that the analysts have not been all that aggressive with their estimates in general and that is true with this stock as well. The average rating is a buy but there hasn’t been much chatter from the community since mid-summer and no-few of the notes that have been issued are downgrades or lowered price-targets.
The factoid that makes the revenue so good is that most of it is recurring/returning revenue. The company’s reorder-revenue grew 9.6% for the quarter and 14.4% for the first half of the year. This puts the total of recurring revenue at 90% of the total and ensures revenue is at least sticky if not still growing. That's good for the dividend.
The goods news, the really good news, is that margins improved significantly over the quarter. The gross margins increase by 270 basis points and the operating margins by 400 bps to drive EPS above consensus. The GAAP fiscal Q2 EPS came in at $0.42 or $0.02 better than expected. To put this in better perspective, the GAAP earnings are up more than 26% quarter to quarter and 34.7% YOY.
“We were encouraged with the strength of our reorder sales and gross and operating margins during the quarter ...The sequential gross margin increase can be attributed to a change in our product mix, with a shift to higher-margin prescription medications. The gross margin increase for the three and six months ended September 30, 2020 was also due to the benefit of having direct relationships with all major manufacturers and the enforcement of their minimum advertised price policies …” said Menderes Akdag, CEO and President.
Petmed Express Is A Dividend Grower, With No Debt
Petmed Express is a dividend-grower with 11-years of consecutive dividend increases. The stock is yielding about 3.65% with shares trading near $29 and offers a discount to the broad market. The CAGR is near 10% so future increases should be substantial. The balance sheet has exactly $0 debt on it so there is no reason to think the company can’t increase the payment at some point in the near future.
Looking at the charts, PetMed may provide an even deeper discount in the very near future. The 2nd quarter results were good, but not good enough to keep the market happy. Shares are down more than 6.5% in early trading and setting a new low. With the low now in play, it is possible shares could fall to $24 or lower. If not looks for a bottom to confirm near the $28.50 level.
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