Morningstar | Patterson Continues to Struggle With Dental Market Headwinds
From our perspective, Patterson's position as a major supplier to dental practices has diminished over the past few years, as competition in the dental consumable segment has increased significantly. What has ensued for Patterson has been retrenching revenue and compressing profits. From what we can gather, the increased competition has emanated from new online-based wholesale players that can source consumables from the cheapest suppliers nationwide. We believe this pressure will last a material amount of time as established online wholesalers will continue to take share and we have seen evidence that new entrants are poised to move into this market niche. Nevertheless, Patterson's expertise in the dental capital equipment market and practice management software product support material customer switching costs and a narrow economic moat. While we believe the competitive environment has tightened, Patterson still possesses a solid distribution network it can leverage into a key driver of economic profits. To maintain the relevance of this distribution network, the company has implemented a major restructuring of its sales and wholesaling operations, which we believe is sorely needed. This strategy includes migrating away from a legacy model that required dedicated sales staff to each of its dental customers and toward a more automated service offering. From our perspective, this is the correct course and should help Patterson work through its current issues. Even though the firm is making the correct strategic moves to build more efficiency into its operations, the pace of this change will be the key determinant of how successful the current management team will be at preserving economic profits. From our perspective, the price of consumable dental and animal health products will continue to deteriorate over an extended period and will likely pressure gross profitability. We believe it’s incumbent upon Patterson to make the necessary organizational adjustments to move its business from a cumbersome regional structure predicated upon sales experts and toward a more streamlined centralized operation based upon cost optimization.Patterson Companies is a distributor serving the U.S. and Canadian dental supply and the U.S., Canadian and U.K. animal health supply markets. The company operates through two business units, Patterson Dental and Patterson Animal Health. Patterson Dental provides consumable products, including infection control, restorative materials, hand instruments and sterilization products; technology dental equipment; technology solutions, including practice management software and e-commerce solutions; patient education systems; and office forms and stationery to dentists, dental laboratories, institutions, and other healthcare personnel. Patterson Animal Health is a distributor of animal health products.
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