When Earnings Miss, Investors Hiss
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When a small cap company reports earnings that don’t meet or exceed analysts’ estimates watch out below. That’s exactly what happened when PetMed Express (NASDAQ: PETS) reported earnings on July 23, sending the shares down by more than 15%. All too often investors hiss and growl for no reason after an earnings miss, but in this case you can see why they’ve put this stock in the dog house.
Last week I wrote that, “the upcoming quarter is traditionally their highest earning quarter of the year. Analysts are expecting revenues to increase by 4.4% year-over-year with a corresponding 4.5% increase in earnings putting those numbers at $76.8 million on the revenue line and earnings of $0.23.” Well, they reported earnings of just $0.20 a share against revenue of $69 million, missing on both ends. The company was able to pick up 197,000 new customers for the quarter, but that’s down from the 226,000 they picked up for the same quarter last year. While that miss was bad enough and sales growth seems to be slowing down, they further pointed out in the press release that their online sales dropped by 3% in the quarter.
The big culprit, according to the company, is coming from order size as customers are buying smaller quantities as well as trading down. Add to this the company’s aggressive discounting and some product unavailability and you have everything you need for a big earnings miss. The real question is if the company can turn things around or if they are just going to roll over and play dead.
In the press release CEO Menderes Akdag said that, “to address the decrease in sales for the quarter, we are focusing on advertising efficiency and shifting sales to higher margin items, while continuing to expand our product offerings.” If they want to play with the big dogs of Amazon (NASDAQ: AMZN), Wal-Mart (NYSE: WMT) and PetSmart (NASDAQ: PETM) then they need to get this right. The problem is that they really are having trouble competing on price alone and have been kicking up their ad spend in an attempt to grow their customer base.
As a small company, one of their biggest competitive advantages is their 1-800-PetMeds brand, which is also known for its exceptional customer service and support. They cannot compete against Amazon’s online scale, nor can they beat Wal-Mart on pricing of pet products. What they need to do is become the go-to name pet parents turn to after taking Fido to their local VCA Antech vet. They need to work toward being the place you get your pet’s meds because of the value proposition. It has to be such that you’re not going to spend more for the convenience of picking them up from your vet.
For those following my paper trading portfolio, the “No Drip, No Mess” Portfolio, this means we’ll likely see our puts assigned at the end of next month. In the article I reference earlier I said that, “If earnings come in at anything less than those numbers (referenced above), we’ll more than likely be assigned on our puts. We want to own the shares so the only bad outcome for us would be a huge earnings beat leaving us without shares and no options to write new puts.” Barring a huge market rally, shares should be assigned by mid-september.
Despite the miss, I still think the company can make investors’ money. They generated $13.8 million of cash last quarter and continue to be cash flow positive. Much of that cash will continue to be devoted to that dividend we want added to the portfolio. However, if the company keeps disappointing investors we could see VCA Antech (NASDAQ: WOOF) or PetSmart look at making a bid for the company. They are still growing their customer count and are cash flow positive in an industry that still has a lot of room to run. They’d be a nice strategic acquisition for either company if they wanted to beef up their online presence.
latimerburned has an options position on Wal-Mart. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com, PetSmart, and VCA Antech. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.