PetMed Down to Sell - Analyst Blog

On Jun 7, 2014, Zacks Investment Research downgraded PetMed Express, Inc. PETS to a Zacks Rank #4 (Sell).

Why the Downgrade?

PetMed posted a mixed fourth-quarter fiscal 2014 with earnings beating the Zacks Consensus Estimate but revenues missing the same. Earnings per share EPS of 23 cents in the quarter came in 2 cents ahead of the Zacks Consensus Estimate. On the other hand, net sales in the quarter dropped 4.9% year over year to $48.6 million and also missed the benchmark by 6.5%.

Sales were negatively impacted due to an intense winter season resulting in lower new order and reorder sales. Despite a favorable reaction to promotions which increased average order size to $77 in the quarter from $75 in the year-ago period, there was a huge 11.0% drag in new order sales driven by increase in customer acquisition costs. This, in turn, led to a year-over-year decline in sales.

In addition, mountingproduct costs and discounts continued to take a toll on the company's gross margin. Although, during the reported quarter, gross margin expanded 24 basis points year over year to 35.9% due to cost reduction in certain brands, the company expects no improvement in margin trends in the coming year.

The company predicts fiscal 2015 to follow the same quarter-to-quarter trend as observed in the previous fiscal. The June quarter usually being the weakest of the lot, we expect margins to fall in the first quarter of fiscal 2015.

Of late, PetMed has been witnessing downward estimate revisions given the lack of any significant growth catalyst and persisting intense competition, which escalate operational and financial risks.  

Meanwhile, the Zacks Consensus Estimate for 2014 declined 1.12% to 88 cents per share, in the last 60 days.

Other Worthy Financial Stocks

While we prefer to avoid PETS for the time being, some better-ranked stocks in the broader healthcare sector such as The Cooper Companies Inc. COO, Steris Corp. STE and ICU Medical, Inc. ICUI are worth considering. All these stocks sport a Zacks Rank #2 (Buy).