PetMed Express (PETS) has been bogged down with another disappointing quarter. The company reported an EPS of 19 cents for the fourth quarter of fiscal 2011, missing the Zacks Consensus Estimate of 22 cents and dropping by 30% from the year-ago quarter’s 27 cents. For the full year, the EPS was 92 cents, way below the Zacks Consensus Estimate of 96 cents and year-ago EPS of $1.14.

Net revenues of PetMed increased 1.2% year over year to $50.9 million, beating the Zacks Consensus Estimate of $49 million. The rise in sales during the quarter was mainly attributable to a 2.7% increase in reorder sales (to $41.5 million). The number of new customers during the quarter was 130,000 compared to 134,000 for the fourth quarter of fiscal 2010.

For fiscal 2011, the company reported net sales of $231.6 million, beating the Zacks Consensus Estimate of $230 million but witnessed a 2.8% decline compared to fiscal 2010. PetMed acquired approximately 645,000 new customers during fiscal 2011 compared to 815,000 in the prior-year.

The dissatisfactory performance of PetMed resulted from increased customer acquisition costs as well as a fall in new order sales due to increased competition, softer demand for some of its products and customer sensitivity to price.

However, the company adopted an aggressive pricing strategy combined with increased advertising in order to boost sales by increasing its customer base. In addition, it is focusing on expanding its product offerings in pet supplies.

Gross profit during the quarter decreased 12.9% year over year to $17.5 million leading to a 560 basis point (bps) fall in gross margin. Total operating expenses increased 6.7% to $11.0 million leading to a 33.8% year-over-year dip in operating income. Operating margin during the quarter, contracted by 678 bps to 12.65%.

PetMed exited the quarter with cash and short-term investment of $59.8 million, up from $53.1 million at the end of March 2010. Cash flow generated from operations was $30.1 million, up from $27.7 million at the end of March 2010. PetMed repurchased approximately 465,000 shares for $7 million during the quarter and increased the quarterly dividend by 25% to $0.125 per share.

We remain concerned about the intensely competitive scenario of PetMed. Though the company designs a more aggressive pricing strategy, advertising and wide product portfolio, the near-term outlook does not hold promise due to lower margins and economic uncertainty forcing consumers to switch to cheaper alternatives.

We have an ‘Underperform’ recommendation for PetMed.

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