Stable demand should help PetMed (PETS) emerge stronger from pandemic

PetMed Express (NASDAQ: PETS) has been around for a long time, expanding its foothold in the lucrative pet care market at a slow but steady pace. Last year, the company recorded solid earnings growth that exceeded estimates. Investors responded positively and its market value more than doubled since then. However, the sentiment weakened in recent weeks after the company reported lower-than-expected earnings for the first quarter.

PetMed’s shares have gone through several ups and downs in recent years – bouncing back strongly after every pullback – and the volatility is continuing. They have gained about 40% since the beginning of the year. The stock has been resilient to the pandemic so far and the current valuation is favorable.

Strong Demand

The stock is likely to see an upside once normalcy returns to the market, thanks to Americans’ penchant for pets that play an important role in their lives. The well-being of pets is never compromised and that explains the solid growth of the pet care industry. That’s good news for PetMed, which is a leading online pet pharmacy in the country.

Established more than two decades ago, PetMed is part of a multi-billion-dollar industry that keeps growing. That, together with the strong fundamentals, makes it an attractive investment option. Also, the company has been paying dividends handsomely, with an average yield of 3.4%.

But, the recent price cuts, a strategy adopted by the management to tackle the growing competition, can restrict margin growth though the COVID-related disruption is unlikely to have a major impact on PetMed’s business.

Online Prowess

The e-commerce platform has remained busy during the crisis days as pet owners shifted their purchases to online and also due to seasonal factors. There was a record increase in customer additions in the past few months even as the company tweaked its product mix considering the changing market conditions. There is no reason for online traffic to subside in the post-pandemic scenario, whatever it may be.

Going forward, the management is likely to spend more on advertising, a policy that worked well during the pandemic days. While advertising costs were favorable in the first half, they might increase in the coming months. There will be continuing efforts to revamp the e-commerce platform and the mobile application to enhance the customer experience.

Impressive Q1

During the three months ended June, net sales grew 20% annually to $96.2 million, driving up earnings by 50% to $0.39 per share. While sales topped expectations, the bottom-line missed.

“During the June quarter, consumer demand continued to be strong for e-commerce, with pet owners shifting their purchases to online. Our sales have been positively impacted due to this increased demand coinciding with our peak season. As an essential business, we have been open during our normal business hours without any material disruptions in our operations,” said PetMed’s CEO Menderes Akdag while talking to analysts at the post-earnings meeting.

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Read the comments of management/analysts on PetMed’s latest quarterly report

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PetMed operates as 1800PetMeds, selling health products and prescription and non-prescription pet medications mainly in the US. As of July, the company had a market capitalization of about $668 million.