Disappointing Quarter for PetMed (PETS)

PetMed Express (PETS), America’s largest Pet Pharmacy, began fiscal 2010 on a disappointing note. The company reported its first quarter fiscal 2010 earnings per share (EPS) of 32 cents. This was way below the Zacks Consensus Estimate of 38 cents and the year-ago quarter’s 36 cents.

Net sales of the company declined 3.6% year over year to $74.4 million. The company derives most of its revenues from repeat business; reorder sales were $57.6 million, up 7% from the first quarter fiscal 2009. The real strength of reorder business lies in its stability and recurring stream of revenue that allow PetMed to focus on new areas to grow its business.

The first quarter was challenging for the company as it had to reduce advertising due to the unavailability of affordable slots on TV. This is a big blow for the company as it is dependent on advertising to increase its customer base. Moreover, consumers were more price sensitive and reduced their spending on pets. As a result, the company’s expenditure on advertising declined by 10% year over year to $8.8 million. Based on a reduction in advertising and general and administrative expenses (4.4%), operating expenses were lower by 8%.

Moreover PetMed has succeeded in increasing sales through its website. While online sales increased by 1% to $52.3 million, orders placed through the website increased 3 percentage points to 70%.

Gross profit during the quarter came down by 7% to $27.22 million. In addition, gross margin declined to 36.6% from 38% in the year-ago period. The company exited the quarter with cash and cash equivalents of $66.9 million, up from $53.1 million at the end of March 2010.

Although we are pleased with PetMed’s wide product portfolio catering to dogs, cats and horses, we remain concerned about the intense competitive scenario. However, with a gradual recovery in the economy, we expect spending on pet products to improve in due course.

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