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PetMed Express: an Investor’s Best Friend?

Petmeds Express logoWith annual sales of $233 million and over 2.6 million active customers, Pompano Beach-based PetMed Express (NASDAQ: PETS) is the largest pet pharmacy in America, and a leading online provider of medication, nutrients, and health-related supplies to pet owners and their dogs and cats. Leveraging the trends toward online commerce, an aging pet population, and the impending shift from topical medication to prescription pills, PetMed focuses on the health management needs of its customers’ pets. About 45 percent of sales comes from prescription medication, 45 percent from health-related products, and 10 percent from pet lifestyle products.

Health-related trends in the pet population mirror trends affecting their owners. These include rising levels of life expectancy, yet greater presence of disease and chronic conditions such as obesity, thyroid, and arthritis. Like their human companions, pets are benefiting from greater awareness of the impact of a nutritional diet.

A key factor impeding PetMed Express’ sales growth over the last couple of years has been the emergence of numerous brick and mortar and online retailers that have expanded their efforts in the pet health category, seizing upon an obvious area of consumer interest. PetMeds’ strengths include the ability to fulfill 80 percent of prescription orders through an online customer care group, at prices that range from 10 to 50 percent below veterinarians’ prescription medication prices. PetMeds boasts an 80 percent one-day turnaround time on orders, and an 80 percent reorder rate among customers. PetMeds’ highly efficient operations yield over $1 million in revenue per employee, which enables it to achieve a 12 percent operating margin, 20 percent higher than PetSmart, its closest publicly-traded peer, despite a dramatically lower sales volume. That said, competition ranks as the number one impediment to PetMeds’ near-term growth.

An experienced management team has been focused on identifying areas of profitable growth for the company, including a greater emphasis on higher margin prescription drugs. Newly introduced creative advertising may help to generate sales to new customers, an area which has been growing at a slower rate in the last year. While the company develops a profitable growth strategy, investors can draw upon a dividend, which has increased steadily over the last several years. Its current yield is 4.4 percent.

PetMeds’ core competencies in online distribution, customer service, efficient inventory management, and advertising, combined with a 2.6 million pet owner active customer base, and solid balance sheet make it an under-valued asset, one which we believe will grow in value over time.

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