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PetMed Slips to Neutral

Zacks Equity Research

Recently, we downgraded our recommendation on PetMed Express (PETS) to Neutral. After a solid start in fiscal 2014, PetMed posted an unimpressive second quarter performance with earnings lagging behind our expectation. Although better-than-expected revenues remain as an upside, increasing product costs and discounts laid huge pressure on margin. This nationwide pet pharmacy presently carries a Zacks Rank #4 (Sell).

Why the Downgrade?

PetMed reported earnings per share of $0.21 in the second quarter of fiscal 2014, a penny short of the Zacks Consensus Estimate. However, the figure remained 3.0% up on a year-over-year basis. Net sales in the quarter increased 4.0% year over year to $60.5 million, beating the Zacks Consensus Estimate by a whisker.

Increasing product costs and discounts continued to take a toll on the company’s gross margin. During the reported quarter, gross margin contracted 148 basis points (bps) year over year to 31.8% due to increasing product costs and discounts. On the other hand, a 2.5% rise in general and administrative expenses and a 5.9% drop in advertising expenses supported a 2.4% reduction in operating expenses (without depreciation). Yet, adjusted operating margin contracted 13 bps to 11.2%.

Meanwhile, the company continues to face competitive pressure in the hugely fragmented pet medications market. The dearth of any major near-term catalyst might make it difficult for PetMed to overcome these challenges in the near future.

Other Stocks to Consider

However, better-ranked medical device stocks like Natus Medical Inc. (BABY), AngioDynamics Inc. (ANGO) and CryoLife Inc. (CRY) are worth considering. All three stocks hold a Zacks Rank #2 (Buy).

Read the Full Research Report on PETS
Read the Full Research Report on ANGO
Read the Full Research Report on BABY
Read the Full Research Report on CRY

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