We came across a bearish thesis on PetMed Express, Inc. (PETS) on Substack by Tiny Stock Ninja. In this article, we will summarize the bears’ thesis on PETS. PetMed Express, Inc. (PETS)’s share was trading at $4.67 as of Nov 26th. PETS’s trailing P/E was 21.55 according to Yahoo Finance.
A close-up shot of a store shelf stocked with pet food and supplies.
Following the review of PETS’ Q2 2025 earnings and the recent Sidoti Conference presentation, there is a cautious outlook on the company’s prospects. While PETS showed some positive signs, such as an increase in gross margin and a significant inventory reduction, there are growing concerns about its ability to maintain profitability and revenue growth in the near future.
On the positive side, PETS saw its gross margin increase sequentially from 26.4% to 29%, which is a sign of improved operational efficiency. Due to a deliberate SKU rationalization effort, the company also reduced its inventory dramatically, from $28.6 million in Q1 2024 to $13.1 million in Q2 2025. However, this raised concerns about the need for replenishment, as PETS historically maintains about $20 million in inventory. Additionally, the average order value rose slightly to $96 from $94, but this increase was primarily due to inflation in MAP pricing rather than actual growth in order sizes, which suggests limited organic expansion. The company also boasts a strong balance sheet, with $52 million in cash and no debt, which provides a solid financial foundation.
Despite these positives, there seem to be significant risks ahead as PETS experienced two consecutive quarters of revenue decline, with Q1 2025 down 13.2% year-over-year and Q2 2025 down 16.1%. Although management has focused on customer retention, the numbers reveal troubling trends, particularly in reorder sales, which decreased nearly $10 million sequentially. Customer acquisition also slowed considerably, with new customer additions dropping from 113,000 in Q2 2024 to 77,000 in Q2 2025, while the cost to acquire each new customer rose. These metrics point to challenges in growing the customer base and retaining existing customers. While gross margin improved, gross profit dollars were still down, and the company’s adjusted EBITDA margin remained low at 3.5%, even after management’s efforts to streamline costs and focus on retention.
Looking ahead, there are concerns about the potential for further margin deterioration. PETS increasingly rely on discounts to drive customer acquisition, which could negatively impact profitability in the coming quarters. Coupled with rising customer acquisition costs; this may lead to continued revenue decline and potential net losses. Even if revenue grows, it is likely to come at the expense of margins, leaving the company in a difficult position between pursuing growth at a loss or sacrificing top-line expansion for profitability.
Overall, PETS’s ability to successfully navigate these challenges is uncertain. While there is still hope for a potential turnaround, the market seems to be overly optimistic about the company’s future prospects, given the current trends and lack of progress in key areas.
PetMed Express, Inc. (PETS) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 15 hedge fund portfolios held PETS at the end of the third quarter which was 17 in the previous quarter. While we acknowledge the risk and potential of PETS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PETS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article was originally published at Insider Monkey.