We have reaffirmed our Neutral recommendation on
PetMed Express
(
PETS
), following its second-quarter fiscal 2013 results.
PetMed reported earnings per share (EPS) of 20 cents in the
quarter, a penny ahead of the year-ago quarter and also above the
Zacks Consensus Estimate of 17cents per share. Net sales remained
almost unchanged at $58.1 million, but surpassed the Zacks
Consensus Estimate of $57 million.
Despite the several recent headwinds like the unavailability
of the
Novartis
(
NVS
) brands leading to a decline in average order value and a change
in product mix to lower-margin items, we are encouraged to note
that the company is working on these issues.
PetMed is currently asking veterinarians to prescribe
additional brands that have made almost 60% pet owners to shift
from the Novartis brands. In the reported quarter, the company
added 177,000 new customers compared with 184,000 in the year-ago
period. The company is also working on improving the
effectiveness of its campaigns. It has been quite successful in
pushing its sales via the Internet, which is reflected in the
2.9% increase in online sales. Approximately 77% of the company's
orders were generated on the website compared with 74% in the
corresponding year-ago quarter.
Despite an improving top line, gross margin continued to
languish and dropped 90 basis points to 33.3% during the quarter
with the average order size declining 5% to $72. This reduction
was primarily due to the additional discounts as well as a shift
to lower-priced product mix, mainly generics. Increase in freight
costs was also responsible for the lower margin. Although the
company is undertaking several initiatives to revive its top
line, any benefit in the near term can be ruled out.
Meanwhile, PetMed operates in a highly competitive and
fragmented pet medications market with peers like
PetSmart
(
PETM
). However, we are impressed with the fact that PetMed is
striving to expand its portfolio to drive top line and is
targeting every possible means to shift customers from the
Novartis brand.
Currently the stock retains a Zacks #3 Rank (Hold) in the
short term.
NOVARTIS AG-ADR (NVS): Free Stock Analysis
Report
PETSMART INC (PETM): Free Stock Analysis
Report
PETMED EXPRESS (PETS): Free Stock Analysis
Report
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