This is from Blodget regarding Pets.com about 3 months ago:
pets.com, Inc. – 26 July 2000
2
Pets.com reported solid 2Q results, beating our revenue and
EPS estimates. We are adjusting our 2000 to reflect 2Q results,
but are waiting to raise forward estimates. The company said it
will be revising its operating plan to account for new
efficiencies and lower capital requirements in the net few
weeks. We therefore believe our current estimates could be
conservative. 2000E revenue goes to $42.4mm from $42.0mm,
and adjusted EPS loss estimate goes to d$4.41 from d$4.70.
This was a very solid 2Q, as pets continued to improve its
fundamental metrics. The company increased revenue
sequentially by 15%, increased conversion rates, and increased
repeat rate, while lowering gross margin loss, operating
expenses. Positive initiatives during the quarter included its
second distribution center becoming fully operational, which
helped gross margins, and the acquisition of select assets of
petsotre.com, which included not only its customer base but
also two strategic relationships with Discovery Channel and
Safeway.
While it is still very early in the pet etailing space, pets.com is
clearly emerging as the leader. Pets has been deemed the
leader by each of PC Data Online, Gomez Advisors and
Nielsen/Net Ratings, and now finally Media Metrix. For
instance PC Data Online recently reported that monthly
buying activity at Pets.com more than doubled from April
to May, and that its visitor-to-buyer conversion was
highest of all e-commerce companies at about 20%. The
report also indicated that while petopia.com and
petsmart.com were competitive in terms of traffic, actual
purchasing was falling on these sites. The company
believes the online pet market will grow to a $3-4 billion
market by 2003, which should bode well for the leader.
Given its new level of efficiencies and focus on profitability,
pets believes its operating losses may be as much as half of
what they had previously projected. Accordingly, Pets.com
now estimates that it will only need to raise an additional
$100mm-$125mm in to break even, down from $200-$250
previously. This could bring in the time to break even status a
year or more sooner than planed. According to our model, we
estimate pets will turn a profit in 2004. As we get better
visibility on the model we could advance that by a few quarters.
Cutting its losses and capital needs are clearly important
positives for the company, and should help them as they look to
raise money in the next few quarters. While management said
it won’t need capital until 1Q01, it is currently in early
discussions with investors. The recent investment from
Discovery.com should also help this process. However, given
the lack of new capital currently flowing into public B2C
companies, this obviously remains the biggest near risk for both
the company and the stock.
IPET has been pounded with the rest of the online retailing
sector, even as it continues to exceed the goals it set at its
IPO in February. We believe the weakness is the result of
the general swoon in the sector, rather than any
incremental news about the company. Investor fatigue
with the B2C internet market in general, intense
competition in the sector, and the early stage of the market
and company continue to be real risks for the stock, despite
the continued improvements in operating performance.
Revenues grew 15% seq. to $8.8mm, beating our $8.3mm est.
Revenue upside was driven by: 1) incremental new customers,
2) increased orders and 3) increased repeat purchase rate.
Pets.com added 179,000 new customers during 2Q, ahead of
our 139,000 est., and up both 1Q at 120,000 adds and 4Q at
128,000 adds. This is an encouraging trend, given the 1Q/4Q
sequential drop, growing total customer count by 68% to
443,000. Importantly these do not include the 100,000 or so
customers the company acquired from petstore.com. The
percentage of orders from repeat customers increased to 59%
from 50% last quarter, versus our 42% est. Our calculated net
revenues per order dropped to $20 from $32 in 1Q, well
below our $35 est., though the company only specified that it
was below 1Q’s $30-40 range. This was due to couponing both
to keep up with couponing by the competition, and for
marketing initiatives with amazon.com. While no couponing is
better than couponing, pets was still able to achieve better sales
than our estimate (coupons net against gross revenue), so we
are comfortable with the balance of obtaining new customers
and growing revenues. Pets.com said the level of couponing
died down somewhat in the last 20-30 days, and that it expects
average order size in 3Q to be back in the $30-40 range.
Gross margin loss improved significantly to (20%), versus our
(27.5%) est., and (63.6%) in 1Q. This was driven by increasing
product margins of 25-30% which were similar to last quarter,
but in the high end of that range, and increased efficiencies at
the second distribution center, which is now in full production
and fulfilling over half of all orders. We expect product
margins to continue to increase, possibly to 40-45% long term.
Pets is on track to be gross margin positive for the full 3Q.
Sales and marketing was down significantly from both 1Q and
our est. This was despite the fact sales growth was better than
ewxpected. We find pets.com’s decision and ability to clamp
down on spending in a tough environment encouraging. S&M
decreased 41% seq. to $17.1mm vs. our $22.1mm est. and vs.
$28.9mm in 1Q. In addition, new customers were higher than
our est., driving down the customer acquisition cost (CAC).
Our calculated CAC fell to about $56 versus our $111 est. and
from $183 in 1Q. The front end costs associated with building
a brand should continue to keep CAC high in absolute terms,
though we expect it to trend down over time.
Operating loss ex-non cash charges improved to (271%) versus
our (370% )est., and from (506%) in 1Q, driven mostly by
better gross margin and S&M.
Adjusted net loss was $23.0mm, an improvement from
$38.0mm in 1Q, and better than our estimate of $30.2mm.
Adjusted EPS. Adjusted EPS of d$0.85 was significantly
better than our d$1.13 estimate.
Cash and equivalents were $37.2mm, down $32.9mm
from 1Q, due to losses from operations, in addition to
capex spent for the new DC and new office in San
Francisco. |
