Description

This is a relatively illiquid company with a market cap under $100mm. That, plus the inherent speculative nature of it, likely makes this only suitable for PAs or very small funds. PETS was written up as a short last year by bigvic when the stock was at $20 - this was a great call and bigvic identified some real problems with the management team and correctly made the call that operations would not turn around.

To be clear, operations have not gotten better (FY23 EBITDA +$19.8 million, FY24 +$8.2 million, Q125 -$1.5 million), but I believe the stock has declined to a level that's potentially below liquidation value, and far below what the customer list would be worth to a strategic acquirer (likely CHWY, potentially others). There is now a new CEO, former board member Sandra Campos. She was appointed in late April and the old CFO has also been relieved of her duties.

The stock has been on my radar for a number of years and has always been some combination of shady, getting disrupted, or just plain incompetent (sometimes all three). What makes it interesting now is as simple as looking at the balance sheet and understanding the LTV of pet pharmacy customers.

There are 20.9 million diluted shares outstanding at $3.15, for a $66 million market cap. The company has $46 million of cash and no debt. Inventory of ~$25 million effectively nets out with accounts payable of just under $25 million. The company also has a sales tax payable liability of $25.3 million. This was revised upwards a few quarters ago and the amount was restated to the current level after they revisited their accounting policies. Effectively this is money they may have to pay states for prior periods where they weren't collecting sales tax on online orders. I have no unique view of whether this is the correct number or when it might actually come due, but they worked with RSM to restate this last year and I just view it as debt.

Summing the above factors up, you have an enterprise value of ~$45 million. In addition, PETS owns their corporate HQ and DC in Delray Beach, FL. The total land is 14.6 acres and houses 2 buildings that total 185k sqft. The plot is adjacent to a waterway with a golf course on the other side. There appear to be some low-value apartments in the surrounding area, plus a large-scale apartment building just north of the land. I'll let real estate experts chime in, but if it's worth $1 million an acre then the adjusted EV is ~$30 million. The address is 420 South Congress Ave if you want to take a look.

PETS in their latest 10-K highlights they've sold product to over 2.0 million customers in the last three years. They added 75k gross customers in Q1 (ended 6/30) at a $93 CAC. So your EV/customers is ~$15 but you're paying $93 to acquire new ones. CHWY is the main competitor that is eating their lunch, and this has been going on for multiple years. CHWY has a stated goal of adding/converting 1 million customers to pharmacy sales in their current FY (base of healthcare/pharmacy customers for them was ~4 million at the start of the year). I believe a very material portion of their $187 million of advertising and marketing spend in their latest quarter is going to pharmacy customer acquisition. Why not just use a small fraction of this and overnight bring on potentially 2 million people who have already shown a willingness to buy pet pharmacy products online or via phone (i.e. not through their vet)?

There has been other recent PE activity in the pet space. Earlier this week, Bansk Group agreed to acquire PetIQ for ~$1.5 billion, a 51% premium to the last share price and a ~12.6x EBITDA multiple on PETQ's 2024 numbers.

The new CEO was appointed in late April and is highly incentivized to sell the company. She received 483k RSUs that vest over 3 years but have accelerated vesting if she's let go after a change of control. She also would receive 24 months of salary ($550k/yr) in that scenario.

Catalyst

Sale

Operational turnaround (unlikely though)