Zacks_Analysts' Blog : PetMed Beats on EPS, Revs Miss - Analyst Blog

America’s largest pet pharmacy, PetMed Express (PETS) reported an EPS of 19 cents for the second quarter of fiscal 2012, down 13.6% from the year-ago quarter, but ahead of the Zacks Consensus Estimate of 14 cents.

Net sales of PetMed declined 4.9% year over year to $58.2 million, lower than the Zacks Consensus Estimate of $60 million. Sales were down due to the company’s aggressive pricing on flea and tick products, which reduced the average order size. Moreover, due to a pending litigation against one generic Frontline product, PetMed decided against participating actively in the generic flea and tick market, thereby affecting sales.

The company expects to be actively involved in the generic flea and tick market in 2012, which should improve revenues. PetMed added 184,000 new customers during the quarter, compared with 185,000 in the second quarter of fiscal 2011.

Lower sales coupled with stable cost of sales resulted in a 230 -basis point (bps) decline in gross margin to 34.2%. A 2% decline in general and administrative expenses (to $5.6 million) along with a 7.8% drop in advertising expenses ($7.9 million) lowered operating expenses (excluding depreciation) by 5.5% to $13.5 million.

Despite reduced advertising expenses during the quarter, new order transactions remained relatively flat. Approximately 74% of PetMed’s orders were generated on the website compared with 72% in the corresponding quarter of last year.

PetMed exited the quarter with cash and short-term investment of $47.1 million, compared with $49.6 million at the end of March 2011. The company repurchased approximately 894,000 shares during the quarter for $9.1 million.

PetMed offers a wide range of products for dogs, cats, and horses. The company markets its products primarily under well-known brands of medication such as Frontline Plus, K9 Advantix, Advantage, Heartgard Plus, Sentinel, Interceptor, among others. We nevertheless remain concerned about the intensely competitive scenario facing PetMed with the presence of peers like PetSmart (PETM). While advertising on television continues to remain challenging, the company is banking on better efficiency and creativity to differentiate itself from others.

The stock retains a Zacks #4 Rank (Sell) in the short term. However, on a longer term perspective we are Neutral on PetMed.