Dogness Limps Ahead As Investors Chase Its Stock

Key Takeaways:

• Dogness’ revenue fell to $14.8 million in its fiscal year through June, as it reported a second consecutive annual loss
• The pet product maker’s stock has soared since February, including a more than sevenfold gain since it raised $5 million through a private placement in May

By Doug Young

Pet care may be big business in China, but don’t tell that to the many companies trying to make a living by selling everything from collars to grooming brushes and water bowls to the country’s millions of dog and cat owners. Adding to the difficulties, Chinese consumers may be curbing their spending on such non-essential products in the current climate of economic uncertainty.

Western markets where pet ownership is already quite high could provide brighter prospects for some of these Chinese pet specialists, though those markets are not only more mature but also fiercely competitive.

Those realities are all howling out in the latest financial results from Dogness (International) Corp. , whose revenue continued its downward trajectory in its latest fiscal year after peaking in 2022. We’ll review the report in more detail shortly.

But first we should point out something else about Dogness, namely a huge gain in its stock this year. The shares are up by more than 10 times since February, much of that after the company made a $5 million private placement in May. The huge run-up has given the company, which has lost money in its last two fiscal years, a fat market value of $700 million.

Put differently, the company currently trades at a whopping price-to-sales (P/S) ratio of nearly 40, based on last year’s shrinking sales. By comparison, global peers Chewy and Wag! Group trade at far more sedate ratios of 1.04 and 0.33, respectively. That raises the question of what exactly is going on with Dogness’ stock and whether the current meteoric price is sustainable – topics we’ll explore later in this review.

But first we’ll look at Dogness’ latest results, which are hardly anything to bark about. Things looked far more promising when Dogness listed on the Nasdaq in 2017 as China’s economy was booming and people were more than happy to pamper their pets with the finest collars, doggie clothing and other accessories and services.

Spending on pet care in China was expected to grow 17% each year between 2019 and 2024, by which time it would be worth 449.5 billion yuan ($63 billion), according to third-party market data provided in the 2021 IPO prospectus for Boqii , a rival provider of pet care products. That prospectus noted that first-time pet owners made up 80% of the China market, with 22.8% of Chinese households owning a pet in 2019, suggesting big potential for growth.

Fast forward to the present, when Boqii’s market value has shrunk to just $2 million from hundreds of millions of dollars at its height, and the company was forced to leave the New York Stock Exchange’s main board last year and move to the small, thinly traded NYSE American.

Dogness doesn’t seem in danger of such a fate, at least not based on its current market value that is more than sufficient to maintain its Nasdaq listing. But things could change if the air comes out of its overinflated stock, which seems like a strong possibility at some point.

Sagging revenue at home and abroad

Dogness reported its revenue fell 15.6% to $14.8 million in its fiscal year through June from $17.6 million the previous year. That decline continues a two-year streak after the company’s revenue peaked in its 2022 fiscal year at $27 million.

While we’ve noted the big potential of the Chinese market, we should point out that Dogness actually makes about two-thirds of its money by selling its pet products overseas. That part of its business fell 10.6% in its latest fiscal year, while domestic sales tumbled by 24.4%.

“We continue to face challenges due to intense competition in the domestic market and the ongoing trade dispute between China and the United States, which are impacting and will likely continue impacting our domestic and export sales in the near future,” said CEO Chen Silong.

The company earns most of its money from traditional pet products, which account for about 60% of its revenue, and more high-tech products accounting for most of the rest, called “intelligent” products. Such intelligent products have emerged as the company’s big Achilles heel, with revenue from that category tumbling 41% in its latest fiscal year to $4.4 million. The declines for the category occurred both at home and abroad, suggesting that people are less willing to spend as lavishly on their pets as they once were.

Dogness did a good job controlling its costs, with the result that its net loss for the latest fiscal year narrowed to $6.1 million from $7.5 million the previous year. The company’s cash rose to $7 million at the end of June from $4.5 million a year earlier following the $5 million private placement in May, showing Dogness won’t be facing a cash crunch in the near future.

That brings us back to the question of what’s going on with the company’s stock. Dogness shares traded mostly down after their 2017 IPO, then briefly soared in 2021 during a wave of bullishness on overseas-traded Chinese stocks. But the shares crashed after that to below the $1 level, forcing Dogness to implement a 20-for-1 reverse share split a year ago.

The stock began to perk up around February. Then it really took off after the announcement of the private placement, which was priced at $2.50 per share, representing a discount of more than 50% to the price at that time. Since the announcement of the placement, the stock has jumped from about $6 to its latest close of $45.50.

All this suggests the private placement investors, who were unnamed in the announcement and now own 18% of the company, may be playing a role in the big stock run-up. We’ve also seen a number of other U.S.-listed Chinese companies become “meme stocks” similar to what happened with GameStop (GME.US), so it’s possible Dogness’ shares have simply become a play toy for similar speculative buyers.

The bottom line is that nothing can justify this kind of valuation and stock run-up for a company whose revenue is shrinking and that’s losing money. Accordingly, we wouldn’t be surprised to see a relatively large correction in the stock price in the next year, bringing this overinflated stock back down to earth.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.

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