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Balanced View on PetMed

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On Feb 19, 2014, we issued an updated research report on PetMed Express (PETS - Free Report) . The company reported an unimpressive third-quarter fiscal 2014 with in-line earnings per share (EPS) and revenue miss. This nationwide pet pharmacy presently carries a Zacks Rank #3 (Hold).

PetMed’s EPS of $0.23 during the third quarter of fiscal 2014 were in line with the year-ago figure as well as the Zacks Consensus Estimate. Revenues were up 1% year over year to $50.1 million, but missed the estimate by 4%.

Although we are encouraged by the company’s efforts to revive the topline, lower new order sales were a drag. Moreover, increasingproduct costs and discounts laid huge pressure on the margin.  During the reported quarter, gross margin contracted 98 basis points (bps) year over year to 33.7%. Adjusted operating margin also contracted 54 bps to 14.5%. Meanwhile, the company continues to face competitive pressure in the hugely fragmented pet medications market.

We note that, throughout the last fiscal, the sales of PetMed had been adversely affected by the unavailability of branded products from Novartis due to the suspension of its production. However, we are impressed with the fact that PetMed is striving to expand its portfolio in order to drive the top line and is targeting every possible means to shift customers from the Novartis brand. Such strategies include focus on advertising efficiency to improve new order sales along with shifting sales to high-margin items.

Key Picks from the Sector

Nonetheless, medical stocks such as Natus Medical Inc. (BABY - Free Report) , AngioDynamics Inc. (ANGO - Free Report) and ABIOMED, Inc. (ABMD - Free Report) are expected to do well. While BABY carries a Zacks Rank #1 (Strong Buy), ANGO and ABMD hold a Zacks Rank #2 (Buy).

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