Shares of PetSmart (NASDAQ:PETM) are on a roll, having gained almost 14% this year. PetMed Express Inc. (NASDAQ:PETS), meanwhile, has struggled as rising television advertising costs have eaten into its profit. Its shares have slumped more than 36% this year.
PetMed, best known for its 1-800-PetMeds service, is struggling mightily. Net income in the quarter ended June 30 was $4.8 million, or 22 cents per share, down more than 33% from net income of $7.2 million, or 32 cents, a year earlier. Revenue at the Pompano Beach, Fla.-based company fell 1.1% to $73.6 million. Results were hurt by “more aggressive flea and tick pricing,” the company said.
I suppose the dog ate their homework, as well.
What’s really crushing PetMed is competition from the likes of Amazon.com (NASDAQ:AMZN) and PetSmart, which both have flea and tick prevention products on sale on their websites. With its $240 million market capitalization, PetMed doesn’t have a prayer against Amazon ($96.8 billion) or PetSmart ($5.14 billon). And the more likely buyer is PetSmart, the leading pet specialty retailer.
The Phoenix-based company seems like it needs the help. Online sales are such a small deal to PetSmart that there isn’t a peep about them in its last corporate earnings press release. Having PetMed would give PetSmart a competitive edge against behemoths such as Wal-Mart (NYSE:WMT) and Target (NYSE:TGT).
If the companies can get their acts together, the opportunity is huge. About 62% of U.S. households own a pet, according to the American Pet Products Association. More than $50 billion is projected to be spent on pets this year, up from $48.35 billion in 2010, the association says.
PetSmart has performed impressively in challenging economic times. First-quarter results beat Wall Street estimates, and the company boosted earnings guidance and reported a 5% increase in same-store sales. PetSmart opened 38 net new stores in 2010, but its 2011 plans were unclear; a company official declined to comment because of the earnings quiet period.
In June, PetSmart extended a nice olive branch to shareholders by boosting the dividend by 12% and starting a $450 million share buyback.
Earnings in the current quarter are expected to rise to 51 cents per share on revenue of $1.48 billion, increasing more than 6%. That’s not bad, but with 48,000 associates and more than 1,192 pet stores in the U.S., Canada and Puerto Rico, the company has grown as far as it can grow. The stores have reached the saturation point in some markets — for instance, there are three PetSmarts in a 30-mile radius of my house in New Jersey.
Wall Street still sees some bite left in PetSmart, though not much of one. The mean target is $48.69, near the $45.29 where it currently trades. Targets for PetMed are $9.75, below the $11.30 trading level.
PetSmart and PetMed will do far better together than they ever could as separate companies. The best bet for investors is the better-managed PetSmart. At some point, it also might attract a buyer like its rival Petco did in 2006.
Jonathan Berr does not own shares of any companies listed.
