Value Line recently initiated coverage of PetMed Express (PETS) in its flagship product, The Value Line Investment Survey. It is, essentially, a pet pharmacy selling prescription (40% of fiscal 2012 sales) and non-prescription products (59%) under the name 1-800-PetMeds using a direct to consumer business model. It operates in all 50 states and sells over 1,200 items, while making additional items, such as food, beds, crates, and strollers, available through third party relationships.
The company markets its products through national television, online, and direct mail and print advertising. Its advertising generally directs customers to either call the company or go to its website. A usually lower cost point than buying from the local veterinarian is the main value proposition that PetMed offers. It also works hard to maintain high levels of customer service, including fast delivery, easy returns, and positive interactions with company employees via phone or digital means. These aspects, however, are more about retention of customers than acquiring them.
PetMed notes that annual pet spending in the United States is a $50 billion business, with supplies and pharmaceuticals accounting for about $12 billion of the total. The company believes its niche of the market is about $4 billion in size. The market, however, is dominated by veterinarians. Indeed, most vets will provide prescription drugs at the time of service. Breaking the often very personal relationship between the consumer and the doctor is not easy, particularly for drugs that are needed to solve an immediate health issue. However, cost savings for medications used to treat longer-term health concerns are an obvious wedge that PetMed can use to its advantage. However, quick service times, including the ability to mail many products within 24 hours, is an important selling point and a key focus of the company’s advertising.
The nature of the company’s business is slightly different than a brick and mortar retailer and, thus, different metrics need to be monitored. For example, customer acquisition costs (advertising costs divided by new customers) are important in a direct to consumer model where the only way to gain new customers is to advertise. Clearly, the less it costs to bring on new customers the more effective the advertising. Repeat customers also become more important, since these customers don’t require material up-front spending to generate sales. That said, even repeat business requires a certain amount of advertising spending. Average purchase is another metric to note, since a falling number suggests a weakening sales trend.
The company’s website accounted for about 75% of sales in fiscal 2012. This fact makes having a highly functional and up to date website vital for the company. Although it is easy to leverage a web based sales platform, a failure to keep up with changing technology could result in top and bottom line weakness. Moreover, the impact could be swift if PetMed fails to invest adequately in its technology.
The company has one main facility from which it dispenses its products in Florida. Although this allows the company to more easily live up to its service quality goals, it presents a material risk to operations should the facility be unavailable for some reason. In Florida, such concerns as hurricanes and tornados are not immaterial. Although they may only cause delays in shipping, those delays could be material for customers expecting quick delivery times.
As a pharmacy, PetMed is subject to a material amount of regulation and oversight and is required to maintain licenses in all states in which it wishes to do business. Thus, it must comply with the rules and regulations of all 50 states. An inability to do business in any one state could result in a material loss of revenue. It is worth noting that approximately 50% of the company’s customers reside in just eight states: California, Florida, New York, Texas, Pennsylvania, Virginia, North Carolina, and New Jersey.
The company’s sales have some seasonality, so investors should expect a little lumpiness on the top line. That said, it is also important to remember that spending on pets is optional. While some might find that statement offensive, medical care for a pet can be put off or not undertaken at all. As such, while somewhat resilient, economic pressures can still have a negative impact on PetMed’s business. This is vastly different from providers of healthcare to humans.
PetMed Express is offering a non-traditional service in an industry long dominated by a single set of providers, veterinarians. It has a relatively strong foothold and looks likely to continue to gain market share. Interested subscribers should consult Value Line’s regular quarterly reports on PetMed to keep tabs on the company’s current and prospective business. Note that supplemental reports highlighting important news as it occurs are also important to watch for.
At the time of this articles writing, the author did not have positions in any of the companies mentioned.