We have reaffirmed our Neutral recommendation on
), following its fourth quarter and fiscal 2012 results.
PetMed reported $55.9 million as revenues during the fourth
quarter of fiscal 2012, surpassing both the year-ago quarter and
the Zacks Consensus Estimate. The company reported an EPS of 20
cents for the quarter, a penny above the year-ago quarter and ahead
of the Zacks Consensus Estimate of 18 cents.
The 10% year-over-year rise in revenues during the quarter was
possible on the back of higher reorder sales which went up by 7% to
$44.4 million along with a 22% rise in new order sales to $11.5
million. PetMed added around 162,000 new customers during the
quarter compared with 132,000 in the year-ago period though the
average order size declined by $2 to $76 due to aggressive pricing
adopted by the company.
Although the cost to acquire a customer increased marginally to
$43 ($42 in the year-ago quarter) the company is targeting the
online medium for better effectiveness of its campaigns. This is
significant as securing the advertising space will be more
challenging with the upcoming presidential election. Meanwhile, the
company is recording increasing sales of generics, which should
help in stabilizing gross margin.
Approximately 76% of PetMed's orders were generated on the
website compared with 73% in the corresponding year-ago quarter.
During the conference call, the company noted that its sales were
adversely affected due to the manufacturing issues at
Despite a rise in revenues, net income dropped as margins
continue to languish. During the reported quarter, PetMed recorded
lower margins, primarily due to aggressive pricing and increase in
advertising to drive sales. PetMed would continue to advertise
aggressively (with higher budgets for the fiscal 2013) while
expanding its product portfolio, including generic pet medications.
We thus expect operating margin to remain under pressure in the
Meanwhile, PetMedoperates in a highly competitive and fragmented
pet medications market. To address the increase in competition in
the flea and tick segment, PetMed has adopted an aggressive pricing
strategy that has affected its gross margin. PetMed's peer,
) is scheduled to release first quarter 2012 results on May 22,
Our recommendation is backed by a Zacks #3 Rank (Hold) in the
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