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America’s largest pet pharmacy, PetMed Express (PETS - Analyst Report) reported earnings of 23 cents per share in the fourth quarter of fiscal 2013, 2 cents ahead of the Zacks Consensus Estimate and up 15% year over year. Fiscal 2013 earnings per share were 86 cents, up 7.5% year over year.

Net sales in the quarter were down 8.6% year over year to $51.1 million, way below the Zacks Consensus Estimate of $55 million. The decline was a result of the negative impact of the colder-than-normal weather on sales. For the full year, the company reported $227.8 million in sales, a decline of 4.4%. The fiscal sales were adversely affected by the unavailability of branded products from Novartis (NVS - Analyst Report) due to the suspension of its production. However, the company noted that the loss from this suspension was to some extent compensated by certain brands. Moreover, online sales at the end of the fiscal, occupied 77% of total sales, compared with 75% in the year-ago period.

Gross margin expanded 176 basis points (bps) to 35.7% during the quarter on the back of a shift toward higher margin product mix, including generics. A 19.7% decline in advertising expenses (to $5.6 million) as well as a 4.8% drop in general and administrative expenses (to $5.2 million) led to a 13.1% reduction in operating expenses (without depreciation) to $10.7 million. Consequently, operating margin improved 285 bps to 14.7%.

PetMed exited the fiscal with cash and cash equivalents and short-term investments of $33.6 million compared with $57.1 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. 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 Conceptus, Inc. and Myriad Genetics (MYGN - Analyst Report). Both the stocks carry a Zacks Rank #1 (Strong Buy).

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