PetMed Express Remains Neutral - Analyst Blog


We have reaffirmed our Neutral recommendation on PetMed Express ( PETS ), 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 Novartis ( NVS ).

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 near future. 

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, PetSmart ( PETM ) is scheduled to release first quarter 2012 results on May 22, 2012.

Our recommendation is backed by a Zacks #3 Rank (Hold) in the short term.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: NVS , PETM , PETS

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