Last week was jam packed with some big companies reporting their second-quarter earnings amid broader market highs. In addition to the market behemoths, 27% of the S&P 500 will report this week, including a number of smaller but equally important companies. On Monday, a small-cap industry leader, PetMed Express Inc (NASDAQ:PETS) reported great first-quarter earnings. The company, also known as 1-800-PetMeds, is America’s largest pet pharmacy, delivering prescription and nonprescription pet medications for dogs and cats directly to the consumer at steep discounts. Over the last few years the company has established itself as the more convenient alternative to driving to the vet to buy your animals their medications.
The announcement
Shares jumped almost immediately in the session as the market needed to digest the spectacular performance. Sales came in at $74.2 million compared to sales of $69 million during the same period last year, an increase of 7.6%. The rise in sales was due to increases in both new-order and reorder sales. The average order was approximately $77 for the quarter in comparison to $73 during the first quarter last year. The increase was due to a favorable reaction to promotions, which in recent quarters were limited due to rising costs.
The thesis
I have been following this company for some time now. Over the last year, the company has avoided overspending for advertising, the real driver of sales. Management was being responsible. Why overspend today when the rising costs are a temporary result of the presidential election? On the company’s previous conference call last quarter, management stated it would once again be stepping up the advertising budget when prices fall during the first quarter. As a result of the increase in advertising spending, the company generated a 9.6% increase in new-order sales in addition to a 7.1% rise in reorder sales.
Going forward, I believe the company will continue to benefit from a number of tailwinds. First is a shift to generic medications. Generics may sell for far less, but they provide much higher margins to retailers. Everyone wins. The second, an increase in the number of animals to historical levels. During the most recent economic recession, we witnessed the level of animal ownership decline. As the economy comes back to full swing, I expect to see the number of pets increase, thus generating higher revenues for the company. Higher revenues with higher margins, you can’t beat that.
The competition
The company does face competition from a few other online competitors, including Amazon.com, Inc. (NASDAQ:AMZN) yet the competition hasn’t been an important factor to the growth of the company. The online pet medications market is competitive with low barriers to entry, the main differentiating factor is advertising. Amazon purchased wag.com along with a basket of other specific e-commerce websites with catchy domain names during 2011 from Quidsi. I would expect wag.com to benefit from the same tailwinds, increasing pet populations and generic medications, however I don’t believe the company will take market share away from Petmed Express Inc (NASDAQ:PETS). Last quarter, PetMed Express added 207,000 new customers. It will be interesting to see if Amazon gives us greater guidance regarding this sector in the quarters ahead.
The more diversified pet retailer, PetSmart, Inc. (NASDAQ:PETM), will additionally benefit from the previously mentioned tailwinds. The company has underperformed the broader markets this year, up 4.7%, yet the company has done exceptionally well over the last five years:
Trading at 18 times forward earnings, the company doesn’t look too expensive, considering analysts estimated 15% growth next year.
Wrapping up
Petmed Express Inc (NASDAQ:PETS) reported a great quarter as a result of successful advertising campaigns in combination with numerous tailwinds. I expect the entire pets space to benefit in the years ahead as the population of pets returns to normal levels and as the number of generic pet medications rise, improving profit margins.
Nathaniel Matherson has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and PetSmart. The Motley Fool owns shares of Amazon.com.
The article Why You Should Care About Pet Medications originally appeared on Fool.com.
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