America’s largest pet pharmacy, PetMed Express (PETS), reported adjusted earnings per share (EPS) of 19 cents in the second quarter of fiscal 2015 (excluding the one-time charge for an IT-related discontinued project). Earnings fell short of both the Zacks Consensus Estimate and the comparable year-ago number by 9.5% or 2 cents.
Net sales in the quarter also dropped 4.8% year over year to $57.6 million which lagged the Zacks Consensus Estimate of $60 million. Year-over-year sales were negatively impacted by decreases in new order and reorder sales. According to the company, demand for flea and tick topical was soft in the reported quarter. Despite that, the average order size has increased to $75 in the quarter from $73 a year ago.
During the quarter under review, PetMed acquired 152,000 new customers, down from 169,000 in the second quarter of fiscal 2014. Roughly 80% of all orders were generated from its website (versus 79% in the prior-year quarter).
Gross margin expanded 23 basis points (bps) year over year to 32.1% due to shift in sales to higher margin items. General and administrative expenses declined 2.3% year over year to $5.4 million while there was a 1% drop in advertising expenses to $6.9 million. This led to a 1.6% reduction in adjusted operating expenses (without depreciation and discontinued project costs), which amounted to $17.1 million. However, adjusted operating margin contracted 48 bps to 10.7%.
PetMed exited the quarter with cash and cash equivalents and short-term investments of $50.2 million compared with $33.8 million at the end of fiscal 2014.
Recommendation
PetMed reported a disappointing performance in the second quarter of fiscal 2015 with both earnings and revenues lagging the Zacks Consensus Estimate and also falling short of the year-ago number. Continued decline in new order sales due to an increase in customer acquisition cost and lesser advertising raised concern. As earlier expected by the company, operating margin maintained its downward trend and the company expects no improvement in this regard through the rest of the 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 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 #3 (Hold).
Stocks to Consider
Some better-ranked stocks in the broader medical sector are Groupon, Inc. (GRPN), Stamps.com Inc. (STMP) and Orbitz Worldwide, Inc. (OWW), all carrying a Zacks Rank #2 (Buy).
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