PetMed Downgraded to Underperform - Analyst Blog

We have recently downgraded PetMed Express (PETS) to Underperform with a target price of $15.00.

PetMed Express, the largest Pet Pharmacy in the US, began fiscal 2011 on a disappointing note. The company reported fiscal first quarter 2011 EPS of $0.32, below the Zacks Consensus Estimate of $0.38 and last year's $0.36. Net sales of the company declined 3.6% year over year to $74.4 million.

Sales were adversely affected due to increased retail and online competition and the lack of television remnant space availability at affordable rates. This is a big blow for the company as television advertising has been PetMed’s primary marketing tool to increase its customer base. In addition, a positive correlation between the amount of television advertising done by the company and sales has been observed.

During the quarter, the number of new customers acquired was 220,000, down from 297,000 in the year-ago quarter. PetMed also witnessed a 28% decline in new reorder sales to $16.8 million. Economic uncertainty has forced customers to become price sensitive, as a result the average order has come down by $2 to $82. We have lowered our earnings estimates for 2011 and 2012 by $0.15 to $1.09 and $0.23 to $1.18, respectively.

During the first quarter, PetMed’s gross margin declined 140 basis points (bps) year over year to 36.6% due to aggressive sales promotions and higher product costs. A 4.6% reduction in general and administrative expenses and a 10.4% reduction in advertising expenses brought down operating expenses by 8.2% to $15.05 million.

Lower advertising expenses were due to the lack of availability of affordable television slots. As a result, the company witnessed an increase in advertising cost to $40 from $33 in the year-ago period to acquire a customer. These factors were responsible for the decline in PetMed’s operating margin by 102 bps to 20.22%. We do no expect the situation to improve significantly in the near future.