Spruce Point Capital Releases A Strong Sell Research Opinion On PetIQ, Inc. (Nasdaq: PETQ)

NEW YORK, April 30, 2019 /PRNewswire/ -- Report entitled "A Flea and Tick Infested Investment" outlines how PETQ faces 75-90% downside risk to approximately $2 to $8 per share due to fundamental challenges in its core pharmaceutical distribution business, unrealistic growth expectations in its recently-acquired services segment, and a broader appreciation of the company's dubious past and questionable management team.

• Fundamental Challenges In The Core Pharmaceutical Distribution Business: PetIQ purchases prescription and OTC veterinary pharmaceuticals from veterinarians and licensed distributors. Manufacturers have historically restricted themselves from selling to non-licensed distributors or directly into the retail channel to protect veterinarians from retail competition. However, major manufacturers are now beginning to sell directly to retail – as is Merial, the manufacturer of PetIQ's most popular products. Wider competition and greater retailer transparency into distributor margins with the opening-up of the veterinary drug distribution industry could bring PetIQ product segment operating margins, 8-9% as of today, closer to the 1-3% margins shown by other pharmaceutical distributors.

• VIP – A Suspicious Acquisition With Unrealistic Growth Prospects: In Jan 2018, PetIQ paid $220M to acquire VIP Petcare, an operator of veterinary clinics and pet wellness centers which, it was later revealed, supplied nearly 50% of PetIQ's distributed products. Management says that it envisions the combined business as a "one-stop shop" for consumers' veterinary needs. However, while it pitches the new "services business" as a 25% grower, we estimate that segment organic growth has been closer to 1-2%, and believe that management's plan to roll out 1,000 "store-in-a-store" pet clinics through the next five years could burn over $200M in cash without generating positive earnings before FY23. We believe that the transaction was more likely motivated by management's desire to acquire more direct manufacturer relationships and better access to rebates, which, alarmingly, were responsible for over 100% of the combined business' pro forma FY17 earnings. The close pre-acquisition relationship between VIP and PetIQ, the high price which PetIQ paid for VIP, and abnormal pre-acquisition earnings patterns at VIP are, taken together, cause for concern.

• A Company With A Dubious Past And A CEO Tied To Vendor Rebate Schemes:

W.T.F. Wholesale – PetIQ's apparent predecessor – was accused of stealing hundreds of thousands of dollars' worth of pet medication from vets before allegedly reincorporating as a registered subsidiary of "True Science Holdings," later renamed PetIQ. True Science appears to have formed non-arms-length relationships with veterinary drug wholesalers through the first half of the 2010s, and was later accused of using these relationships to manufacture inflated assets and earnings.

CEO McCord "Cord" Christensen's bio on PetIQ's website fails to disclose that he was a major funnel of investor money into the Petters Ponzi scheme. He was characterized as an unknowing victim in court proceedings, but was closely associated with Petters as an employee and business partner through the 2000s, and controlled several entities which recruited millions of dollars of investor money for Petters. He was also involved with subsidiaries of Fleming Corp, which fraudulently applied vendor rebates to inflate earnings, and collapsed into bankruptcy.

• A Valuation Tethered To Unrealistic Expectations And Blind To Risks: We believe that PETQ is set up to disappoint due to sell-side optimism around sales growth and margin expansion despite headwinds facing its core products business and poor wellness center economics, and despite the fact that product segment gross margins are at risk to changes in animal drug distribution practices. Analysts value PETQ using a multiple more than double that of other pharmaceutical distributors, but we believe that any premium earned by its perceived sales growth potential is offset by its poor earnings quality, inability to generate cash flow, and downside risks to margins.

Spruce Point Capital has a short position in PetIQ, Inc (PETQ) and stands to benefit if its share price falls.

About Spruce Point Capital
Spruce Point Capital Management, LLC, is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities.

Contact 
Sean Donohue  
Spruce Point Capital Management 
[email protected] 
212-519-9813

Spruce Point Capital Management, LLC is a member of the Financial Industry Regulatory Authority, CRD number 288248.

SOURCE Spruce Point Capital Management, LLC

SOURCE Spruce Point Capital Management, LLC

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