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America’s largest pet pharmacy, PetMed Express (PETS - Analyst Report) reported earnings of 23 cents per share in the third quarter of fiscal 2013, a penny ahead of the Zacks Consensus Estimate and up 19% year over year. Net sales were down 1.8% year over year to 49.6 million, almost in line with the Zacks Consensus Estimate.

The Florida-based company added 131,000 new customers during the quarter compared with 150,000 in the third quarter of fiscal 2012. Although sales were down, PetMed reported a 1.2% year-over-year increase in reorder sales to $40.9 million.

However, new order sales dropped 13.8% to $8.7 million due to reduction in advertising and lower average order value. Sales continued to be adversely affected by the unavailability of branded products from Novartis (NVS - Analyst Report) due to the suspension of its production.

It seems that PetMed has been successful in increasing sales via the Internet. Approximately 78% of the company’s orders were generated on the website compared with 77% in the corresponding year-ago quarter.

Gross margin expanded 74 basis points (bps) to 34.7% during the quarter. However, the average orders value declined 2.8% to $71. This reduction was primarily due to additional discounts and a shift to lower-priced product mix, mainly generics.

A 15.5% decline in advertising expenses (to $4.6 million) as well as a 1.8% drop in general and administrative expenses (to $5.1 million) led to an 8.8% reduction in operating expenses (without depreciation) to $9.7 million. Consequently, operating margin improved 225 bps to 15.0%.

PetMed reduced advertising expenses during the quarter due to the unavailability of any remnant television space due to the presidential election and the holiday season. However, the cost to acquire a new customer increased to $35 from the year-ago quarter’s $32. The company would continue to advertise efficiently along with shifting sales to higher-margin products, while expanding its product portfolio, including the generic pet medications.

PetMed exited the quarter with cash and cash equivalents of $30.0 million compared with $46.8 million at the end of fiscal 2012.

Recommendation

Although PetMed is still struggling with sales, we are encouraged with the company’s cost reduction initiatives, which aided margin expansion. The company 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 Cyberonics Inc. (CYBX - Analyst Report) and Haemonetics Corporation (HAE - Analyst Report). Both the stocks carry a Zacks Rank #1 (Strong Buy).

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