PetIQ, Inc. is a leading pet medication, product, and wellness company delivering a smarter way for pet parents to help pets live their best lives through convenient access to affordable health and wellness products and veterinary services. The company has two reporting segments: (i) Products and (ii) Services.

Business Overview

The Products segment consists of PetIQ's product manufacturing and distribution business, through which it manufactures and distributes pet medication and health and wellness products to major U.S. retail and e-commerce channels through more than 60,000 points of distribution. The company focuses its offerings on innovative, proprietary value-branded products, and leading third-party branded products for dogs and cats, including pet Rx medications, OTC medications, and wellness products. This segment is further supported by PetIQ's world-class medications manufacturing facility in Omaha, Nebraska and health and wellness manufacturing facility in Springville, Utah.

The Services segment consists of veterinary services, and related product sales, provided by the company directly to consumers. PetIQ's national veterinarian service platform operates at over 2,600 community clinic locations and wellness centers hosted at retailers across 39 states, providing cost-effective and convenient veterinary wellness services. The company offers diagnostic tests, vaccinations, prescription medications, microchipping, grooming, and hygiene and wellness checks.

Financials

For the full year 2023, PetIQ reported net sales of $1.101 billion, net income of $21.31 million, operating cash flow of $61.89 million, and free cash flow of $52.74 million. In the first quarter of 2024, the company generated net sales of $308.4 million, a 6.2% increase compared to the prior year period. This strong performance was driven by 7% growth in the Products segment, which contributed $276.9 million in net sales. The Services segment also saw a slight increase of 0.2% in net sales to $31.6 million.

Gross profit for the first quarter of 2024 was $74.5 million, an increase of 19.7% compared to $62.3 million in the prior year period. Gross margin expanded 280 basis points to 24.2%, primarily due to the growth and success of PetIQ's higher-margin manufactured brands, as well as operational efficiencies in its facilities and the optimization of the Services segment.

Selling, general, and administrative (SG&A) expenses increased $6.9 million, or 15.9%, to $50.2 million in the first quarter of 2024, primarily due to a $4.7 million increase in marketing expenses to support the growth of the company's manufactured products. As a percentage of net sales, SG&A increased from 14.9% in the prior year period to 16.3%.

Net income for the first quarter of 2024 was $15.0 million, compared to $9.8 million in the prior year period, an increase of 53.6%. Adjusted EBITDA, a non-GAAP metric, increased 15% to $35.3 million, exceeding the company's guidance of $31 million to $33 million. This resulted in the highest adjusted EBITDA margin in the company's history of 11.4%, an increase of 80 basis points from the first quarter of 2023.

Liquidity

PetIQ's balance sheet and liquidity position remain strong. As of March 31, 2024, the company had total cash and cash equivalents of $25.4 million and total debt of $443.9 million. The company's $125 million asset-based revolving credit facility was undrawn, providing total liquidity of $150.4 million. PetIQ's net leverage ratio, as calculated under the terms of its credit facilities, was 3.6x at the end of the first quarter, an improvement from 4.5x in 2023.

Recent Developments

Subsequent to the end of the first quarter, on April 30, 2024, PetIQ completed the sale of its foreign subsidiary within the Products segment, Mark & Chappell, for approximately $4 million in net cash proceeds. The company will also receive future royalties for certain licensed trademarks and related intellectual property. As a result of the transaction, PetIQ expects to recognize an approximate $1.7 million loss, subject to normal working capital adjustments, in the second quarter of 2024.

Outlook

For the full year 2024, PetIQ is raising its guidance for net sales to a range of $1.135 billion to $1.185 billion, an increase of approximately 5% at the midpoint, and adjusted EBITDA to a range of $112 million to $117 million, an increase of approximately 10% at the midpoint. This guidance includes the impact of the Services segment optimization, the sale of the Mark & Chappell subsidiary, and a return to a more normal flea-and-tick season compared to the record seasonal patterns experienced in 2023.

The company is also raising its guidance for 2024 free cash flow to an excess of $50 million, up from its previous guidance of an excess of $45 million. PetIQ's strong financial performance and liquidity position provide the company with the flexibility to continue investing in its business and pursuing strategic initiatives to drive long-term growth and shareholder value.

Geographically, PetIQ's net sales are primarily generated in the United States, with $307.3 million, or 99.6%, of first-quarter 2024 net sales coming from the U.S. market. The remaining $1.2 million, or 0.4%, of net sales were generated in Europe.

In terms of revenue breakdown by segment, the Products segment contributed $276.9 million, or 89.8%, of total net sales in the first quarter of 2024, while the Services segment accounted for $31.6 million, or 10.2%, of net sales. Within the Products segment, the company saw broad-based growth across all product categories, with its manufactured brands growing 14.3% compared to the prior year period.

The OTC flea-and-tick category grew 6.2% in the first quarter, and PetIQ's brands in this category increased 10.6%, gaining market share across all channels and in each of the company's top 10 customers. PetIQ's pet supplement brands also continued to see accelerated consumption and growth, with a 51.2% increase compared to the prior year period, driven by the VetIQ brand and the successful launch of Rocco & Roxie into the premium segment of the category.

PetIQ's dental and treat offerings also outperformed their respective categories, with the Minties brand growing 48% and the Pur Luv treat brand posting outstanding growth of 65% in the first quarter. The company's newest brand, Rocco & Roxie, grew 23.4% in the quarter, driven by its launch into the supplement category and continued growth in the core stain and odor offerings.

In the Services segment, the company ran more mobile community clinics across the country than a year ago and increased its pet counts, which helped offset the lost sales from the 149 wellness centers closed in the second half of 2023. The Services segment also achieved significant operational improvements in the first quarter, leading to a gross margin expansion of 810 basis points.

Conclusion

Overall, PetIQ's strong financial performance in the first quarter of 2024, driven by the continued growth and success of its manufactured brands and the optimization of its Services segment, positions the company well to deliver on its full-year guidance and create long-term value for shareholders. The company's focus on innovation, operational excellence, and providing smarter pet health care solutions makes it an attractive investment opportunity in the pet care industry.