PetMed Beats Estimates

Zacks

America’s largest pet pharmacy, PetMed Express (PETS) reported earnings of 20 cents per share in the second quarter of fiscal 2013, a penny ahead of the year-ago quarter and surpassing the Zacks Consensus Estimate of 17 cents. Net sales remained almost unchanged at $58.1 million, but surpassed the Zacks Consensus Estimate of $57 million.

The Florida based company added 177,000 new customers during the quarter compared with 184,000 in the second quarter of fiscal 2012. PetMed reported a 2.1% year-over- year increase in reorder sales to $46.4 million though new order sales dropped 8.1% to $11.7 million owing to reduction in advertising and lower average order value. Sales continued to be adversely affected by the unavailability of branded products from Novartis (NVS) due to suspension of its production.

It seems that PetMed has been successful in pushing its sales via the internet, which is reflected in the 2.9% increase in online sales. Approximately 77% of the company’s orders were generated on the website compared with 74% in the corresponding year-ago quarter. 

Gross margin contracted 90 basis points (bps) to 33.3% during the quarter with the average order size declining by 5% to $72. This reduction was primarily due to additional discounts and a shift to lower-priced product mix, mainly generics. Increase in freight costs was also responsible for lower margin.

A 4.2% drop in general and administrative expenses (to $5.4 million) and a 6.1% decline in advertising expenses (to $7.4 million) led to a 5.3% reduction in operating expenses (without depreciation) to $12.8 million. Consequently, operating margin improved 30 bps to 11.3%.

PetMed reduced advertising expenses during the quarter due to the unavailability of any television remnant space. However, the cost to acquire a new customer dropped to $42 from the year-ago quarter’s $43. The company would continue to advertise efficiently along with shifting sales to higher-margin products while expanding its product portfolio, including generic pet medications.

PetMed exited the quarter with cash and cash equivalents of $47.0 million compared with $46.8 million at the end of March, 2012. The company repurchased 397,000 shares during the quarter for approximately $3.9 million.

Recommendation

PetMed reported a mixed second quarter with still struggling sales. Although the company is attempting several strategies to revive its top line, it will be a while before any impact is witnessed. The company offers a wide range of products for dogs, cats, and horses and is working on expanding its portfolio. However, the presence of players like PetSmart (PETM) makes the pet pharmacy market very competitive. To address competition, the company has adopted an aggressive pricing strategy that might hurt its margins.

The stock retains a Zacks #3 Rank (Hold) in the short term.

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