PETS Bombs

PetMed Express reported earnings which missed on both the top line & bottom line, causing their shares to fall about 12% in pre-market trade.

Almost immediately after the market opened up shares ramped up hard in a bull trap, which had shares up above $23 each within 45 minutes of open. They were only down a little over a percent at the peak, while the broader stock market was also down a similar amount. And then the share price slid like a rock until 12:30 PM, bottoming at $20.25 a share.

I wanted to trade the initial ramp, but knew it would eventually turn back, so I sat on my hands until after the stock bottomed & started turning up. I put on a dead cat bounce trade when it was about $20.6 a share, though I got a crappy fill at about $20.83 a share. I looked away from the market for about an hour, came back & saw shares at $21.28, so I sold at market, which was executed at $21.2346, for a gain of about $580 on 1,500 shares.

The company has no debt, $93.2 million in cash,  $32.2 million in inventory, a 5.16% dividend yield and a market cap of about $432 million. They’d be a great buy for someone like Mars who perhaps wanted to own a slice of online distribution to limit the negotiation leverage of Chewy.

Back out their inventory & cash on hand and that shaves over a quarter off their absurdly low P/E ratio.

They are no longer a growth story as about 90% of their orders are repeat customers.

Reorder sales increased by 4.6% to $53.3 million for the quarter compared to reorder sales of $50.9 million for the same quarter the prior year. For the 9 months, the reorder sales increased by 9% to $185.9 million compared to $170.5 million for the same period a year ago. New order sales decreased by 26% to $6.8 million for the quarter compared to $9.2 million for the same period the prior year.

conference call transcript

Newer customers have been harder to find online as the size of ads in the search results has increased dramatically over the past couple years, lowering the relative value of organic rankings in the vertical. Ad prices have went up as well, and they’ve sort of sat on their hands with a relatively flat ad budget, instead of passing all their margins onto Google. They’ve also lowered product prices to stay competitive on the price front.

On the conference call they mentioned they planned on increasing their ad spend offline to compliment their online advertising, as online ad rates were up over 10% in the quarter, driving new customer acquisition cost up to $45 from $39 last year.

I am hoping the market is down again tomorrow and they fall further, presenting another opportunity to buy a few shares. 🙂

Their shares are off over 60% from the 52-week high of $51.60. Considering that they have no debt, are cashflow positive & over a quarter of their market cap is cash + inventory, that is quite a steep fall. I wouldn’t be surprised if a value investor pushed for a sale of the company or a PE firm bought them out, stripped the cash, loaded them up on debt, expanded them beyond medications to have a growth story which masks the cash stripping & justifies temporary losses, then listed them public again in a couple years.

During the December stock market rout eBay did not fall as much as most other tech plays, in part because a couple activist value investors were accumulating a significant stake in the company. eBay closed today up 6.13% on the suggestions by Elliot Management Corp. and Starboard Value LP to split the classifieds-ad business & StubHub from core eBay.

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