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America’s largest pet pharmacy, PetMed Express (PETS - Analyst Report) is off to a solid start in fiscal 2014. The company reported earnings per share of 24 cents in the first quarter, 2 cents ahead of the Zacks Consensus Estimate and up 22% year over year.

Net sales in the quarter were up 7.6% year over year to $74.2 million and surpassed the Zacks Consensus Estimate of $69 million. The improvement was on the back of strong new order and reorder sales for the reported quarter. Average order size increased to $77 in the quarter from $73 in the year-ago period. This was mainly the result of a favorable reaction to promotions.

During the reported quarter, PetMed acquired 207,000 new customers versus 197,000 in the first quarter of 2012. Additionally, the company's online sales were up 11% year over year to $58.4, with 79% of orders generated from website (77% in the prior year quarter).

Gross margin remained flat year over year at 32.4% during the quarter as the company used the gains from generics shift in order to discount some of the major brands. A 1% drop in general and administrative expenses (to $5.9 million) and a 5.5% increase in advertising expenses (to $5.6 million) as well as a 4.8% drop in general and administrative expenses (to $10.4 million) led to a 3.1% increase in operating expenses (without depreciation) to $16.3 million. In spite of that, adjusted operating margin improved 97 bps to 10.4%.

PetMed exited the first quarter of fiscal 2014 with cash and cash equivalents and short-term investments of $50.5 million compared with $33.6 million at the end of fiscal 2013.

Recommendation

After quarters of drag in sales, we are encouraged with the company’s solid first-quarter fiscal 2014 performance. Throughout the last fiscal, the sales were adversely affected by the unavailability of branded products from Novartis (NVS - Analyst Report) due to the suspension of its production.

However, we are encouraged with the company’s cost reduction initiatives, which aided margin expansion. PetMed is currently trying to implement several strategies to revive its top line. These strategies include focus on advertising efficiency to improve new order sales and shifting sales to higher margin items, including generics, while expanding its product offerings. The company currently offers a wide range of products for dogs, cats, and horses, and is working on expanding its portfolio. The stock retains a Zacks Rank #3 (Hold).

Other Stocks to Consider

While we prefer to remain on the sidelines on PetMed, other medical device stocks worth a look are Health Net, Inc. (HNT - Analyst Report) and WellPoint Inc. . Both the stocks carry a Zacks Rank #1 (Strong Buy).

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