PetMed Posts In Line Q1 Earnings, Revenues on Lower Orders

America’s largest pet pharmacy, PetMed Express (PETS) reported earnings per share (EPS) of 25 cents in the first quarter of fiscal 2015, on par with the Zacks Consensus Estimate. However, the number remained a penny ahead of the comparable year-ago number.

On the other hand, net sales in the quarter dropped 2.2% year over year to $72.5 million but remained almost in line with the Zacks Consensus Estimate. Year-over-year sales were negatively impacted by decreases in new order and reorder sales. According to the company, the demand was soft for flea and tick topical in the reported quarter. Despite that, the average order size has increased to $78 in the quarter from $77 a year ago.

During the quarter under review, PetMed acquired 184,000 new customers, down from 207,000 in the first quarter of fiscal 2014. Roughly 80% of all orders were generated from its website (versus 79% in the prior-year quarter).

Gross margin expanded 41 basis points (bps) year over year to 32.8% due to cost reduction in certain brands. General and administrative expenses remained unchanged year over year at $5.8 million with a 4.8% drop in advertising expenses to $9.9 million. This led to a 3.1% reduction in operating expenses (without depreciation), which amounted to $15.1 million. Accordingly, adjusted operating margin expanded 59 bps to 11.0%.

PetMed exited the quarter with cash and cash equivalents and short-term investments of $44.7 million compared with $33.8 million at the end of fiscal 2014.

Recommendation

PetMed reported an ordinary performance in the fourth quarter with in-line earnings and revenues. Declining new order sales due to an increase in customer acquisition cost and lesser advertising remains a matter of concern. Although operating margins improved this quarter, the company expects no improvement in margin trend in the coming year.

However, we are encouraged by PetMed’s cost reduction initiatives. Moreover, the company 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.

PetMed currently offers a wide range of products catering to dogs, cats and horses, and is working on upgrading its existing portfolio. The stock carries a Zacks Rank #2 (Buy).

Other Stocks to Consider

Some other well-ranked stocks in the broader medical sector are Mead Johnson Nutrition Company (MJN), CareFusion Corporation (CFN) and Alere Inc. (ALR), all with the same Zacks Rank as PetMed.