America’s largest pet pharmacy, PetMed Express (PETS) reported another disappointing quarter. The company reported an EPS of 22 cents for the first quarter of fiscal 2012, down 30% from the year-ago quarter, missing the Zacks Consensus Estimate of 24 cents.
Net sales of PetMed declined 1.1% year over year to $73.6 million, marginally missing the Zacks Consensus Estimate of $74 million. Sales were down due to the company’s aggressive pricing on flea and tick products. Despite lower sales, new order sales increased by 1.3% to $17 million. Moreover, PetMed added 226,000 new customers during the quarter, better than 220,000 in the first quarter of fiscal 2011.
Lower sales coupled with a 4.9% rise in cost of sales resulted in a 380 -basis point (bps) decline in gross margin to 32.8%. While general and administrative expenses remained almost unchanged at $6.1 million, a 14.2% higher advertising expenses pushed up operating expenses (excluding depreciation) by 7.7% to $16.2 million.
Higher advertising expense has been a major concern for PetMed over the past few quarters. This in turn has increased customer acquisition costs. This is again a big blow for the company as it depends on advertising to increase its customer base. Moreover, the company has been witnessing softer demand for some of its products and customer sensitivity to price.
However, PetMed has succeeded in increasing sales by 3.4% to $54.1 million through its website, deriving most of its revenue from online sales. Approximately 73% of the company’s orders were generated on the website compared with 70% in the corresponding quarter of last year.
PetMed exited the quarter with cash and short-term investment of $49.4 million, almost unchanged from the end of March 2011. PetMed repurchased approximately 1.1 million shares during the quarter for $13.6 million.
We remain concerned about the intensely competitive scenario facing PetMed. Moreover, the company is finding advertising on television, which is the primary medium of attracting customers, to be challenging with a rise in advertising cost. As a result, the cost to acquire a customer has increased substantially. Although PetMed plans to adopt an aggressive pricing strategy, and increased advertising and portfolio expansion, the situation is unlikely to change for the better in the near future.
We have an ‘Underperform’ recommendation for PetMed.
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