Q4 Earnings Beat, Revs Miss Ests at PetMed - Analyst Blog

America's largest pet pharmacy, PetMed Express's PETS earnings per share EPS of 23 cents in the fourth quarter of fiscal 2014 came in 2 cents ahead of the Zacks Consensus Estimate. However, the number remained unchanged year over year. For the full year, EPS came in at 90 cents, up 4.7% from the prior-year quarter.

Net sales in the quarter dropped 4.9% year over year to $48.6 million and also missed the Zacks Consensus Estimate by 6.5%. The sales were negatively impacted by an intense winter season. Fiscal 2014 net sales grossed $233.4 million, up 2.4% from the year-ago period.

During the quarter under review, PetMed acquired 107,000 new customers, down from 125,000 in the fourth quarter of fiscal 2013. Roughly 80% of all orders were generated from its website (versus 79% in the prior-year quarter). Average order size increased to $77.00 in the quarter from $75.00 in the year-ago period.

Gross margin expanded 24 basis points (bps) year over year to 35.9% due to cost reduction in certain brands. General and administrative expenses declined 5.5% (to $4.9 million) with a 1.8% drop in advertising expenses (to $5.3 million). This led to a 5.2% reduction in operating expenses (without depreciation), which amounted to $10.2 million. Accordingly, adjusted operating margin expanded 31 bps to 15.0%.

PetMed exited the fiscal with cash and cash equivalents and short-term investments of $33.8 million compared with $33.6 million at the end of fiscal 2013.

Recommendation

PetMed reported an ordinary performance in the fourth quarter with better-than-expected earnings and a revenue miss. Declining new order sales due to an increase in customer acquisition cost remains a grave matter of concern. Although margins improved this quarter, the company expects no improvement in margin trend in the coming year.

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

The company 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 #4 (Sell).

Other Stocks to Consider

While we prefer to remain on the sidelines regarding PetMed, some of the better-ranked stocks in the broader medical sector worth a look are Accuray Inc. ARAY, Edwards Lifesciences Corp. EW and IDEXX Laboratories, Inc. IDXX, all carrying a Zacks Rank #2 (Buy).