Zacks_Analysts' Blog : Strong Quarter from PetMed - Analyst Blog

America’s largest pet pharmacy, PetMed Express (PETS) reported an EPS of 19 cents for the third quarter of fiscal 2012, a penny lower than the year-ago quarter but well ahead of the Zacks Consensus Estimate of 16 cents. Net sales of PetMed increased 12% year over year to $50.5 million, surpassing the Zacks Consensus Estimate of $45 million. An impressive quarter from the company led to an 11% rise in the stock price to close at $12.51 on Monday.

The company added 150,000 new customers during the quarter compared with 111,000 in the third quarter of fiscal 2011. PetMed reported an encouraging quarter based on higher new order sales (up 29% year over year to $10.1 million), reorder sales (up 8% to $40.5 million) and online sales that climbed 19% to $38.7 million. Approximately 77% of PetMed’s orders were generated on the website compared with 72% in the corresponding quarter of last year.

However, gross margin came down by 350 basis points (bps) to 34% during the quarter due to aggressive pricing and increased product cost. A 2.9% increase in general and administrative expenses (to $5.2 million) coupled with a 22.6% rise in advertising expenses (to $5.4 million) led to lower income from operations. Despite a rise in revenues, operating margin continued to languish at 12.1%, down 350 basis points year over year. The average order size was $73 during the quarter compared with $77 in the year-ago period due to aggressive pricing.

Although the cost to acquire a new customer dropped to $36 from $40 in the third quarter of 2011, PetMed would continue to advertise aggressively while expanding its product portfolio, including generic pet medications. Consequently, we expect operating margin to remain under pressure in the near future.

PetMed exited the quarter with cash and cash equivalents of $41.9 million compared with $49.6 million at the end of March 2011. The company repurchased approximately 118,000 shares during the quarter for $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. The company expects to record improved sales in 2012 based on increasing participation in the generic flea and tick market. The stock retains a Zacks #2 Rank (Buy) in the short term.

We nevertheless remain concerned about the intensely competitive scenario facing PetMed with the presence of peers like PetSmart (PETM). To address competition, the company has adopted an aggressive pricing strategy that is hurting its margins. On a longer-term perspective we are Neutral on PetMed.