With $52 billion in annual sales, the pet products business is also on the company’s radar, which it participates in through multiple channels including its Wag.com unit. However, in a bid to put competitors in the rear-view mirror, could the leading pet pharmacy owner Petmed Express Inc (NASDAQ:PETS) be on Amazon.com, Inc. (NASDAQ:AMZN)’s list of targets?
What’s the value?
Founded in 1996, Petmed Express Inc (NASDAQ:PETS) offers a broad assortment of prescription and non-prescription pet medications, as well as pet supplies, through its namesake website and call centers. The company has been aided by rising per capita spending by pet owners on their canine and feline friends, with the American Pet Products Manufacturers Association estimating that 2012 industry sales were $52.9 billion, up 4.7% versus the prior year. Petmed Express Inc (NASDAQ:PETS) has also benefited from consumers’ continual search for the best price, which the company delivers by capitalizing on its volume purchase discounts.
In its latest fiscal year, Petmed Express Inc (NASDAQ:PETS) posted mixed results, with a 4.4% decline in total revenue, but a 3.9% increase in operating income. The company’s top-line was hurt by a lower average customer order size and the unavailability of certain popular products due to manufacturer production delays. On the upside, PetMed Express’ operating margin received a boost from lower advertising spending, as management pursued lower cost, online advertising channels.
Given Petmed Express Inc (NASDAQ:PETS)’ rising customer acquisition costs, up 5% for the period, the company could get significant mileage from being part of Amazon.com, Inc. (NASDAQ:AMZN)’s network of properties and its ubiquitous brand recognition. The internet giant could certainly reverse Petmed Express Inc (NASDAQ:PETS)’ declining operating margin by leveraging its own efficient fulfillment and marketing operations, thereby driving a greater percentage of gross profit to the bottom line. At a current price to operating profit multiple of 11, an acquisition would be a relatively cheap way for Amazon to gain the top position in the pet medications segment.
Knocking on the door
Of course, pet retailing giant PetSmart, Inc. (NASDAQ:PETM) has the most to lose from Amazon’s growing ambitions in the pet products space. The company is the largest specialty retailer focused on the pet sector, with over 1,200 stores in the U.S., Canada, and Puerto Rico as of December 2012. However, PetSmart, Inc. (NASDAQ:PETM) generates over half of its total sales from the consumables product area, like food and nutritional items, which are susceptible to cheaper prices from online competitors.
In its latest fiscal year, PetSmart, Inc. (NASDAQ:PETM) reported another year of solid growth, with increases in revenue and operating income of 10.6% and 29.4%, respectively, versus the prior year. The company’s sales growth benefited from strong comparable store sales, up 6.3% for the period, as well as the addition of 46 stores to its national network. In addition, PetSmart’s operating efficiency hit a five-year high, leading to a big gain in operating cash flow and the ability to repay shareholders in the form of large share repurchases.
Looking ahead, PetSmart is clearly cognizant of the challenges presented by Amazon and other online channels that can compete favorably on price. The company has been proactively transitioning its food selections to premium and exclusive brands, as well as focusing its employee base on the sale of services. Most stores in its network offer grooming, training, and day care services, which accounted for 11% of revenue during the period and provide a competitive advantage against the online sales channels.
The bottom line
Amazon has a lot on its plate, with its overall mission to dominate every sector that it chooses to participate in. An acquisition of PetMed Express would likely be a value-enhancing move, and the price would be a small hit to its multi-billion dollar cash position. While a larger Amazon might be detrimental to PetSmart’s overall sales growth, PetSmart is positioning itself as a multi-faceted product and service provider to its customer base, which should continue to make it an indispensable outlet in the pet products sector. Since acquisitions are inherently uncertain, investors should probably take a pass on Petmed Express Inc (NASDAQ:PETS), but put PetSmart and Amazon on their watchlist for “pet-friendly” investments.
The article Could This Online Pet Supplier Join the Seattle Web Giant’s Empire? originally appeared on Fool.com and is written by Robert Hanley.
Robert Hanley owns shares of Amazon and PetSmart. The Motley Fool recommends Amazon.com and PetSmart. The Motley Fool owns shares of Amazon.com. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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