PetMed Express (PETS) has posted another disappointing quarter. The company reported an EPS of 22 cents for the second quarter of fiscal 2011, lower than both the Zacks Consensus Estimate of 26 cents and the year-ago quarter’s 28 cents.
Net sales of the company declined 1.9% year over year to $61.2 million, missing the Zacks Consensus Estimate of $63 million. The company derives most of its revenues from repeat business. Reorder sales were $47.9 million, up 4.6% from the second quarter fiscal 2010. The real strength of reorder business sustains from its stability and recurring stream of revenue that allow PetMed to focus on new areas to grow its business.
PetMed has succeeded in increasing sales through its website. While online sales increased by 4.1% to $43.9 million, orders placed through the website increased 5 percentage points to 72%. Gross profit during the quarter came down by 5.7% to $22.3 million. In addition, gross margin declined to 36.5% from 37.9% in the year-ago period.
The reported quarter was challenging for PetMed as it had to pay more in the form of advertising expenses. Advertising expenditure increased by 10.6% year over year to $8.6 million. This is a big blow for the company as it depends on advertising to increase its customer base.
Higher advertising expenses coupled with stable general and administrative expenses ($5.7 million) led to a 5.6% rise in operating expenses (excluding depreciation and amortization) to reach $14.3 million. Moreover, consumers were more price sensitive and reduced their spending on pets.
The company exited the quarter with cash and cash equivalents of $60.5 million, up from $53.1 million at the end of March 2010. PetMed bought back shares amounting $3.5 million during the quarter and increased the quarterly dividend by 25% to $0.125 per share.
Although we are pleased with PetMed’s wide product portfolio catering to dogs, cats and horses, we remain concerned about the intensely competitive scenario. Moreover, the near-term outlook does not look promising due to lower margins and economic uncertainty forcing consumers to switch to cheaper alternatives.
We currently have an Underperform recommendation on the stock.
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