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What Investors Can Expect from PetMed Express in 2017

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Part 4
What Investors Can Expect from PetMed Express in 2017 PART 4 OF 4

Key Risks Facing PetMed Express in 2017

Stock performance

PetMed Express (PETS) stock has risen 77% in the last one-year period, reaching a high of $50.06 on July 26, 2017. This robust return is attributed to strong year-over-year improvement in its net profit margins and a strong cash position in 2017. The increase in PetMed Express’s revenues was driven by flea, tick, and heartworm control products.

PetMed Express’s year-to-date price performance compared to its peers reaffirmed analysts’ positive outlook. While Zoetis (ZTS), Patterson (PDCO), and Rite Aid (RAD) have returned 20.0%, -10.0%, and -80.0% year-to-date, respectively, PETS has generated an ~51.0% return year-to-date.

Key Risks Facing PetMed Express in 2017

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Key risks

On August 24, the Wall Street Journal reported, “An investor shorting PetMed stock who goes by the name Aurelius Value posted a report on his website Wednesday alleging PetMed was intentionally marketing tramadol and other drugs online to opioid addicts.”

The short seller declined to identify himself when contacted by the Wall Street Journal by phone. The short report accused PetMed Express of utilizing targeted online advertisements for search keywords frequently used by prescription drug abusers.

PetMed Express (PETS) fell 15% the day after the August 23 short report was released. Shortly thereafter, several class action lawsuits were filed against PetMed Express seeking recovery of losses by investors. PETS stock is currently ~$37.00.

PetMed Express categorically denied these allegations in its August 25 statement, noting, “By presenting information in a false and misleading fashion, Aurelius Value sought to manipulate the Company’s common stock value.”

The company added, “For the record and contrary to Aurelius Value’s anonymous ‘report’: Sales of Tramadol and Gabapentin have not been driving the Company’s growth. To the contrary, sales of the two prescription medications accounted for only…0.4% of the Company’s total sales for the six-month period ending June 30, 2017. And over the last five years, the Company’s sales of the two medications have actually declined.”

PetMed Express sells these products pursuant to prescriptions from veterinarians for the treatment of animals. These prescriptions can only be shipped after obtaining approval from the prescribing veterinarian.

On September 20, 2017, Aurelius Value published a similar short report about biologic firm MiMedx. On October 4, MiMedx filed a lawsuit against Aurelius Value, accusing the short seller of “libel, slander, defamation, false light, and tortious interference with business relations.”

PetMed Express’s 10-K filing for fiscal 20171 stated, “The Company is a party to routine litigation and administrative complaints incidental to its business. Management does not believe that the resolution of any or all of such routine litigation and administrative complaints is likely to have a material adverse effect on the Company’s financial condition or results of operations.”

Geographic sales

Although PetMed Express (PETS) sells its products in every state, ~50% of its sales come from eight states. In its fiscal 2017 10-K filing, PetMed Express noted that if its license to operate a pharmacy in one or more of these states is suspended, revoked, or not renewed, it could adversely affect its ability to continue its “business as it is presently conducted.”

Pricing

PetMed Express sources many of its products from distributors. Some pharmaceutical manufacturers previously declined to sell pet medications directly to the company. With the entry of PetSmart into online sales, PetMed Express may not have a pricing advantage.

PetMed Express (PETS) comprises ~0.13% of the iShares S&P Small-Cap 600 Growth ETF’s (IJT) holdings.

  1. fiscal 2017 ended March 31, 2017
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