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PetMed Express: Updated Research Report

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On May 23, 2014, we issued an updated research report on PetMed Express Inc. . The company reported a mixed fourth-quarter fiscal 2014 with better-than-expected earnings per share (EPS) and a revenue miss. This nationwide pet pharmacy presently carries a Zacks Rank #3 (Hold).

PetMed’s EPS of 23 cents during the fourth quarter of fiscal 2014 was in line with the year-ago figure but exceeded the Zacks Consensus Estimate by a couple of cents. However, due to an extreme winter season, net sales dropped 4.9% year over year to $48.6 million and also missed the Zacks Consensus Estimate by 6.5%.

Although we are encouraged by PetMed’s efforts to revive the top line, lower new order sales were a drag. Moreover, increasing product costs and discounts put huge pressure on the margin. Although during the reported quarter, gross margin expanded 24 basis points (bps) year over year to 35.9% due to cost reduction in certain brands, the company expects no further improvement in margin trends in the coming year.

According to the company, competitiveness of its product pricing will determine the margin trend in the upcoming period. The company predicts fiscal 2015 to follow the same quarter-to-quarter trend as observed in the previous fiscal. The June quarter usually being the weakest of the lot, we expect margins to fall in the first quarter of fiscal 2015.

Meanwhile, the company continues to face competitive pressure in the competitive and fragmented pet medications market. We expect the impending acquisition of Novartis AG’s (NVS - Free Report) animal health division by Eli Lilly and Company (LLY - Free Report) to create market concentration in the entire economy, leading to an anti-competitive landscape for PetMed.

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Nonetheless, a medical stock such as Mead Johnson Nutrition Company , carrying a Zacks Rank #2 (Buy), is expected to do well.

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