America’s largest pet pharmacy, PetMed Express’ (PETS) earnings per share (EPS) of 23 cents in the third quarter of fiscal 2014 were in line with the Zacks Consensus Estimate as well as the comparable year-ago figure.
Net sales in the quarter increased 1.0% year over year to $50.1 million but missed the Zacks Consensus Estimate by nearly 4%. The improvement came on the back of strong reorder sales (up 3.6% year over year), partly offset by lower new order sales (down 11.5% year over year) in the reported quarter.
During the quarter under review, PetMed acquired 114,000 new customers, down from 131,000 in the third quarter of fiscal 2013. Online sales increased 2.1% with roughly 79% of all orders generated from its website (versus 78% in the prior-year quarter). Average order size increased to $72.00 in the quarter from $71.00 in the year-ago period.
Gross margin contracted 98 basis points (bps) year over year to 33.7% due to increasing product costs and additional discounts. However, general and administrative expenses declined marginally by 1% (to $5.1 million) with a 1.8% drop in advertising expenses (to $6.9 million). This led to a 1.3% reduction in operating expenses (without depreciation), which amounted to $9.6 million. In spite of that, adjusted operating margin contracted 54 bps to 14.5%.
PetMed exited the third quarter with cash and cash equivalents and short-term investments of $41.4 million compared with $33.6 million at the end of fiscal 2013.
PetMed reported an ordinary performance in the third quarter with an in-line earnings and a revenue miss. Declining new order sales with falling numbers of new customer acquisition is a grave matter of concern. Moreover, increasing product costs and discounts are exerting pressure on the bottom line, leading to margin contractions. We note that, throughout the last fiscal, sales were adversely affected by the unavailability of branded products from Novartis (NVS) due to suspended production.
However, we are encouraged by the company’s cost reduction initiatives. Moreover, PetMed is currently trying to implement several strategies to revive its top line. These strategies include focusing on advertising efficiency to improve new order sales and shifting sales to higher margin items like generics, while also expanding its product offerings. The company currently offers a wide range of products catering to dogs, cats and horses, and is working on expanding its existing portfolio. The stock carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
While we prefer to remain on the sidelines regarding PetMed, other Internet commerce stocks worth a look are Amazon.com Inc. (AMZN) and Geeknet, Inc. (GKNT). Both the stocks carry a Zacks Rank #1 (Strong Buy).