America’s largest pet pharmacy, PetMed Express’ (PETS) earnings per share (EPS) of 21 cents in the second quarter of fiscal 2014 fell shy of the Zacks Consensus Estimate by a penny. However, the figure remained 3.0% up on a year-over-year basis.
Net sales in the quarter increased 4.0% year over year to $60.5 million, beating the Zacks Consensus Estimate by a whisker. In spite of flat new order sales, the improvement came on the back of strong reorder sales in the reported quarter. Average order size increased to $73 in the quarter from $72 in the year-ago period.
During the quarter under review, PetMed acquired 169,000 new customers, down from 177,000 in the second quarter of fiscal 2013. Additionally, the company's online sales were up 7.3% year over year to $47.9 million, with 79% of orders generated via the website (versus 77% in the prior-year quarter).
Gross margin contracted 148 basis points (bps) year over year to 31.8% during the quarter due to increasing product costs and discounts. A 2.5% rise in general and administrative expenses (to $5.5 million) and a 5.9% drop in advertising expenses (to $6.9 million) led to a 2.4% reduction in operating expenses (without depreciation), which stood at $12.5 million. In spite of that, adjusted operating margin contracted 13 bps to 11.2%.
PetMed exited the second quarter of fiscal 2014 with cash and cash equivalents and short-term investments of $51.4 million compared with $33.6 million at the end of fiscal 2013.
Recommendation
After an encouraging first-quarter fiscal 2014 performance, PetMed reported an ordinary performance this time with an earnings miss. Flat new order sales and declining numbers of new customer acquisition remain a matter of concern. Besides, increasing product costs and discounts are pressurizing the bottom line, leading to margin contractions. We note that, throughout the last fiscal, sales were adversely affected by the unavailability of branded products from Novartis (NVS) due to suspended production.
However, we are encouraged by the company’s cost reduction initiatives. Moreover, PetMed is currently trying to implement several strategies to revive its top line. These strategies include focusing on advertising efficiency to improve new order sales and shifting sales to higher margin items like generics, while also expanding its product offerings. The company currently offers a wide range of products for dogs, cats, and horses, and is working on expanding its current portfolio. The stock retains a Zacks Rank #3 (Hold).
Other Stocks to Consider
While we prefer to remain on the sidelines regarding PetMed, other medical device stocks worth a look are Mindray Medical International Limited (MR) and Bio-Rad Laboratories, Inc. (BIO). Both the stocks carry a Zacks Rank #1 (Strong Buy).
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