Behind The Numbers – PetIQ (PETQ)
PetIQ (PETQ) is a distributor and manufacturer of veterinarian-grade pet prescriptions, over-the-counter medication and supplies, and health & wellness products, for dogs and cats. In addition with its acquisition of VIP Petcare it is also a provider of pet wellness and veterinary services. These services are provided at wellness centers in large retailers and at company pop-up shops around the country. The company sells its distributed and own-branded products to all major retailers including mass, food, pet specialty, online, drug, and over 40,000 retail pharmacy locations.
As I type this, shares are trading higher by 8% after reporting what look to be solid headline numbers. As always, though, let’s dig into the numbers and earnings call even more.
-EPS of $0.46 vs $0.26 estimate – Beat
-Revenue of $314.5M vs $273.76M estimate – Beat
-Net Sales increased 25% Y/Y
-Products Net Sales increased 27% Y/Y
-Services Net Sales increased 10.2% Y/Y
-Sees Q3 Revenue of $220M – $230M vs $226.9M estimate – Beat
-Sees FY23 Revenue of $1.01B – $1.05B vs $990.82M estimate – Beat
Products Segment –
On the earnings call, management remarked that when you look at all sales channels combined, Y/Y consumption growth in the over-the-counter flea and tick category was the strongest that they’ve seen in the last 36 months at a positive 10.4%. In second quarter of this year, nearly 50% of the over-the-counter flea and tick category sales were generated online.
“When looking at our over-the-counter flea and tick brands, growth in all sales channels for the 12 weeks ended June 17, 2023, our portfolio of OTC flea and tick brands grew a positive 15.3% versus the market’s growth of a positive 10.4%, leading to a gain of a positive 46 basis points of share. These gains were driven by both our PetArmor Plus and Capstar brands.”
COO Michael Smith, when asked about the category during the Q&A, commented that it’s a category that is largely going to be tied to weather-driven demand dynamics and they are seeing conditions this year that are more favorable than the average year and definitely more favorable than last year and more favorable than they had modeled and expected. “So as a category, we expected to see low to mid-single digit growth. We’re seeing high-single digit to low-double digit growth for the category. And then we’re gaining share on top of that and outperforming the category between 300 and 400 basis points depending upon what time frame you look at.”
Meanwhile, the company’s pet supplement segment saw accelerated consumption growth in Q2 as the portfolio grew a positive 19.5% as compared to the prior year. The category also continues to see significant expansion in the quarter, gaining 16.1% over the prior year period. “This fast-growing category has more than doubled over the last 4 years and has surpassed the OTC flea and tick business as the largest category we compete in within our manufactured portfolio.”
In addition, the company’s dog treat business continued to also outperform the category. This growth was led by their dental treat business via the Minties brand, which grew positive 31% and gained 47 basis points of share within the category. Another growth driver their Pet Love treats brand, which expanded by a positive 23%. The newest member of the portfolio, Rocco & Roxie, which they acquired in January of 2023 also saw double-digit growth rates. The Rocco & Roxie brands grew a positive 13.8% in the second quarter, well ahead of their projections.
Finally, CEO McCord Christensen would add that they’ve definitely seen a consumer that’s adjusted their budgets to take care of their pets. “They’re spending again, the high end with what we distribute is definitely performing better than we expected, which also says that the consumers have finally kind of bottomed out whatever was happening with the economy, with the expectations of what was going to happen and they’ve returned to spending on their pets.”
Services Segment –
Within this segment, the company reported net revenue of $36.4 million, an increase of 10.2% as compared to the prior year period and ahead of internal expectations. They experienced improved cancellation rates and solid operational improvements, which allowed for increases in average revenue per clinic and average dollar per pet served during the second quarter of 2023. They also converted 4 wellness centers to hygiene centers in the quarter, and will continue to test “this exciting new addition to the Services segment.”
Later in the Q&A, in response to William Blair’s analyst, they reiterated that the hygiene addition is significant for them. “We’re testing it. We’re measuring it. We’re definitely not declaring victory yet, but we’re very encouraged by what it adds to the location because it’s a list of services that drive great revenue and margin profile.”
Truist analyst Bill Chappell, in his note last night, wrote: “We have literally waited for years for a quarter like this. We have always believed that the model, bringing high end OTC and RX pet products to a broad base of consumers was a good one. However, the trajectory of the business was sidetracked by the expansion into the services business and the related volatility created by the pandemic. We now believe the company, as with most of CPG, has returned to a normal consumer environment in which effective strategies can succeed. To be clear this performance was more than favorable weather for the flea and tick season or easy comps. In our opinion, it was the favorable positioning following a period of heightened pet ownership. Looking forward we believe there is meaningful upside to our estimates as the company simply passed through the 2Q23 beat to increase its FY guidance.”
