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PetMed Express (PETS - Analyst Report) is scheduled to release its third quarter of fiscal 2012 results on Monday, January 23, 2012. The company is expected to earn EPS of 16 cents on revenues of $45 million, according to the Zacks Consensus Estimate.

With respect to earnings surprises over the trailing four quarters, PetMed outperformed the Zacks Consensus Estimate only once. The four-quarter average earnings surprise of 4.58% implies that the company has exceeded the Zacks Consensus Estimate by this magnitude over the period.

Second-Quarter Recap

PetMed reported an EPS of 19 cents for the second quarter of fiscal 2012, down 13.6% year over year, but ahead of the Zacks Consensus Estimate of 14 cents.

Net sales declined 4.9% to $58.2 million, lower than the Zacks Consensus Estimate of $60 million. Sales were down due to the company’s aggressive pricing on flea and tick products, which reduced the average order size. Moreover, due to a pending litigation against one generic Frontline product, PetMed decided against participating actively in the generic flea and tick market, thereby affecting sales. The company expects to be actively involved in the generic flea and tick market in 2012, which should improve revenues.

Agreement of Estimate Revisions

In the last 30 days, out of the six analysts covering the stock, none have revised their estimates for the third quarter of 2012. The same situation holds true for the fourth quarter of the current fiscal as well as full year 2012.

Magnitude of Estimate Revisions

Given the lack of analyst estimate revisions, the current Zacks Consensus Estimate for the third quarter was static at 16 cents over the past 30 days. The consensus estimate for fiscal 2012 has remained unchanged at 75 cents for the last 30 days though it has increased by a penny in the last 60 days.

Recommendation

PetMed offers a wide range of products for dogs, cats, and horses. The company has been reporting improving results for the last couple of quarters. Although the company was adversely affected in the flea and tick business, it expects to record improved sales in 2012. Besides, the completion of one year of price cuts in the flea and tick market should also lead to a rebound in reorder sales based on easier comparisons. The stock retains a Zacks #2 Rank (Buy) in the short term.

However, the pressure on margins continues unabated. Advertising spend is likely to climb as the company expects the scenario to remain challenging for some time.  The competitive landscape is tough with the presence of players like PetSmart (PETM - Snapshot Report) forcing PetMed to adopt a more aggressive pricing strategy. This has taken its toll on the company’s gross margin and lowered reorder sales.

We currently have a Neutral recommendation on the stock.

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