October 21, 2019 / 2:11 PM / 22 days ago

PetMed signs up with major manufacturers, sees price war stabilizing

(Reuters) - PetMed Express Inc (PETS.O) attributed the improvement in its quarterly profit margin to new supply contracts with manufacturers of animal drugs and said it expected the intense price war among online retailers of pet products to ease.

Shares of the company, popularly known as 1800PetMeds, rose 29% to $24.94 after it beat Wall Street expectations for profit following three straight quarters of misses.

Manufacturers such as Elanco Animal Health (ELAN.N) and Zoetis Inc (ZTS.N) depend on veterinarians to prescribe their drugs, and according to experts, have long tried to stay in their good books by only supplying to pharmacies at their practices. But the growing popularity of online retailers such as Chewy.com (CHWY.N) and PetMed is making drugmakers change tact, Craig Hallum analyst Kevin Ellich said.

Sourcing directly from manufacturers also allows online retailers, expanding their footprint, to guarantee a steady supply of reliable products, unlike when relying on excess inventory from veterinarians or buying off a “gray market”.

This also means companies like PetMed are obliged to abide by minimal advertised pricing, where the lowest cost they can advertise for a given product is agreed upon with manufacturers.

“The manufacturers’ minimum advertised price policy should bring in general pricing discipline into the market,” PetMed Chief Executive Officer Menderes Akdag said on a call with analysts.

The shift could stabilize prices throughout the online industry and help PetMed compete with bigger rival Chewy.

Ellich noted that online retailers now face penalties and could lose their contracts with manufacturers if they price products cheaper than the agreed rate, a factor that is leveling the playing field.

In the quarter ended September 30, PetMed’s gross profit margins, a key metric for investors, improved to 28.6% from 27.3% in the quarter ended June, which the company attributed to change in its strategy of buying drugs.

Net income in the second quarter fell 38% to $6.7 million, or 33 cents, as PetMed cut rates in the face of aggressive pricing by other online players.

The profit, however, beat analysts’ average estimate of 26 cents, according to IBES data from Refinitiv.

There has been a growing interest in investing in the pet industry as Americans splurge more on drugs, treats and toys for their pets.

Reporting by Manas Mishra and Tamara Mathias in Bengaluru; Editing by Shinjini Ganguli

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