PetMed Still in Bad Shape - Analyst Blog

PetMed Express(PETS) bogged down by another disappointing quarter. Though the company reported an EPS of 20 cents for the third quarter of fiscal 2011, keeping in line with the Zacks Consensus Estimate, it dropped from the year-ago quarter's 25 cents.

Net sales of PetMed declined 2.37% year over year to $45.1 million, missing the Zacks Consensus Estimate of $47 million. The fall was mainly attributable to a reduction in new order sales. Reorder sales were relatively flat at $37.3 million compared to the year ago quarter. Lower advertising driven by higher advertising cost and increase in customer acquisition costs contributed to this reduction. This is again a big blow for the company as it depends on advertising to increase its customer base. More over the company witnessed softer demand for some of its products and customer sensitivity to price.

However PetMed has succeeded in increasing sales through its website. The company derived most of its revenue from online sales.  Approximately 72% of the company's sales were generated on website compared to 70% for the corresponding quarter of last year.

Gross profit during the quarter decreased 10.1% year-over-year to $16.9 million. In addition gross margin of 37.5% witnessed a fall of 140 basis points. Moreover despite a 5.6% decline in operating expenses (excluding the depreciation and amortization) driven by lower advertising spend, operating margin declined to 16.4% from 18% in the year-ago period. General and administrative expenses margin increased to 11.3% from 10.2% in the year ago quarter due to lower revenue and increased professional fees.

PetMed exited the quarter with cash and short-term investment of $71.3 million, up from $53.1 million at the end of March 2010. PetMed repurchased approximately 66,000 shares during the quarter for $1 million and increased the quarterly dividend by 25% to $0.125 per share

We remain concerned about the intensely competitive scenario of PetMed. Though the company plans to follow aggressive pricing strategy,  increased advertising and  widen its product portfolio, the near-term outlook does not look promising due to lower margins and economic uncertainty forcing consumers to switch to cheaper alternatives.

We have an ‘Underperform' recommendation for PetMed.