PetIQ Inc (PETQ) (Q1 2024) Earnings Call Transcript Highlights: Strong Growth and Margin ...

• Consolidated Net Sales: $308.4 million, at the high end of guidance.

• Gross Margin: Expanded by 280 basis points to 24.2%.

• Net Income: $14.9 million.

• Earnings Per Share (EPS): $0.48, increased 47.8% from Q1 last year.

• Adjusted EBITDA: $35.3 million, up 15% year-over-year, exceeding guidance.

• Free Cash Flow: Guidance raised for annual free cash flow from over $45 million to over $50 million.

• Product Segment Sales: $276.9 million, up approximately 7% year-over-year.

• Services Segment Sales: Slight increase to $31.6 million.

• Marketing Spend: Incremental $4.7 million in Q1; expecting an additional $6 million in Q2.

• Total Debt: $443.9 million as of March 31, 2024.

• Liquidity: Total liquidity at $150.4 million as of March 31, 2024.

• Warning! GuruFocus has detected 3 Warning Sign with PETQ.

Release Date: May 08, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• PetIQ Inc (NASDAQ:PETQ) reported a record Q1 with consolidated net sales of $308.4 million, at the high end of their guidance.

• Net income and EPS increased significantly, with net income at $14.9 million or EPS of $0.48, up 47.8% from Q1 last year.

• Adjusted EBITDA increased by 15% year-over-year to $35.3 million, exceeding guidance and marking the highest adjusted EBITDA margin in the company's history at 11.4%.

• The products segment contributed significantly with net sales of $276.9 million, a 7% increase from the prior year, driven by broad-based growth across all product categories.

• Operational efficiencies and successful brand-building efforts led to gross margin expansion of 280 basis points to 24.2%.

Negative Points

• The services segment showed minimal growth with only a 0.2% increase in net sales to $31.6 million compared to Q1 last year.

• Increased SG&A expenses, primarily due to a rise in marketing costs, which increased by $4.7 million.

• Inventory levels were higher than normal at the end of Q1, attributed to planned seasonal build and timing of inventory availability from distribution partners.

• The company reported a slight increase in total debt to $443.9 million as of March 31, 2024.

• PetIQ Inc (NASDAQ:PETQ) expects to recognize an approximate $1.7 million loss from the sale of the company's foreign subsidiary in the second quarter of 2024.

Q & A Highlights

Q: Can you provide more color on the sustainability of the gross margin improvements seen in Q1? A: McCord Christensen, CEO, highlighted three key factors: the impact of the services segment, the growth in the manufacturing portfolio, and operational efficiencies. He expects these trends to continue, contributing to margin improvements throughout the year.

Q: Given the challenges in the pet category and concerns about the US consumer, what shifts are you seeing in consumer behavior? A: McCord Christensen, CEO, noted that despite some pressures in certain product categories, PetIQ's categories are experiencing good organic growth, and they are not seeing consumers de-prioritize their pets' healthcare.

Q: How is the flea and tick season shaping up compared to your expectations? A: Michael Smith, President and COO, mentioned that the season is performing slightly better than expected, with the category growing closer to 4-5% compared to an anticipated 3%. He expects this trend to continue throughout the year.

Q: Are you still planning to increase marketing spend by $12 million this year, and how are those dollars being allocated? A: McCord Christensen, CEO, confirmed the increase, noting that the spend is front-loaded in the first half of the year. While specifics were not provided for competitive reasons, the investment is expected to support significant brand growth.

Q: Can you discuss the gross margin expansion in terms of product mix versus operational efficiencies? A: Zvi Glasman, CFO, explained that the margin expansion is primarily driven by higher margins in manufactured products and operational efficiencies, rather than a significant change in product mix.

Q: What are the expectations for Rocco and Roxy's distribution gains and their impact on performance? A: Michael Smith, President and COO, stated that distribution gains for Rocco and Roxy are meeting expectations, with significant impacts anticipated in Q2 and beyond, reflecting successful expansions in various product lines.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.