America's largest pet pharmacy,
) began fiscal 2013 on a disappointing note. The company reported
earnings per share ('EPS') of 20 cents for the first quarter of
fiscal 2013, a couple of cents below the year-ago quarter and
missing the Zacks Consensus Estimate of 23 cents. Net sales dropped
6% year over year to $69 million, well below the Zacks Consensus
Estimate of $78 million.
The Florida based company added 197,000 new customers during the
quarter compared with 226,000 in the first quarter of fiscal 2012.
PetMed reported lower reorder sales (down 3% to $55.1 million)
accompanied by a 3% drop in online sales to $52.8 million.
Approximately 77% of PetMed's orders were generated on the website
compared with 73% in the corresponding year-ago quarter. New order
sales decreased by 18% to $13.9 million for the quarter primarily
due to an increase in customer acquisition cost, reduction in
average order size and somewhat reduced advertising.
Gross margin contracted 40 basis points (bps) to 32.3% during
the quarter with the average order size declining by $7 to $73.
This reduction was primarily due to smaller quantities being
purchased by customers, additional discounts, a lower-priced
product mix and an earlier peak season that shifted sales to the
March quarter. In addition, the company's sales were adversely
affected by the unavailability of branded products from
) due to suspension of its production.
A 3.0% drop in general and administrative expenses (to $5.9
million) and a 2.5% decline in advertising expenses (to $9.8
million) led to a 2.7% reduction in operating expenses (without
depreciation) to $15.8 million. Despite lower operating expenses, a
disappointing top-line performance led to a 130 bps drop in
operating margin to 9.5%.
PetMed reduced advertising late during the quarter due to
increase in costs. This is reflected in the 11% increase in cost to
acquire a new customer (to $50). However, the company would
continue to advertise efficiently along with shifting sales to
higher-margin products while expanding its product portfolio,
including generic pet medications. Given these initiatives, we
expect operating margin to remain under pressure in the near
PetMed exited the fiscal with cash and cash equivalents of $57.4
million compared with $46.8 million at the end of March 2012. Cash
flow from operations during the reported quarter increased 62% year
over year to $13.8 million.
We are disappointed with the performance of PetMed during the
quarter. Although the company is attempting several strategies to
revive its top line, it will be a while before any impact is
witnessed. We believe economic uncertainty has been taking a toll
on the company.
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, and Interceptor, among others.
The presence of players like
) makes the pet pharmacy market very competitive. To address
competition, the company has adopted an aggressive pricing strategy
that is hurting its margins.
The stock retains a Zacks #4 Rank (Sell) in the short term.
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