PetMed (PETS) Tops Q4 Earnings And Revenue Expectations

Leading pet pharmacy in the Americas, PetMed Express, Inc. (NASDAQ:PETS) announced earnings per share (EPS) of 27 cents in the fourth quarter of fiscal 2016, up 8% from the year-ago quarter. Earnings also cruised ahead of the Zacks Consensus Estimate of 24 cents. Adjusted earnings for the fiscal year came in at $1.02 per share, up 10.9% from the year-ago period.

Net sales in the reported quarter improved 11% year over year to $55.4 million, beating the Zacks Consensus Estimate of $50 million. According to the company, the improvement was driven by a solid increase in new order and reorder sales. For fiscal 2016, net sales were $234.7 million, an improvement of 2.3% from the previous fiscal.

In the reported quarter, reorder sales went up 8.4% year over year to $46 million, while new order sales increased 24% to $9.4 million.

Average order was approximately $83 for the quarter compared to $81 for the year-ago quarter. The rise in average order value was mainly due to a change in product mix to higher priced items and increased doses.

According to the company, the seasonality in the business is due to the proportion of flea, tick and heartworm medications in the product mix. This is because spring and summer are considered peak seasons in this regard as against fall and winter, which represent off-seasons.

During the quarter under review, PetMed acquired 116,000 new customers, up from 97,000 in the fourth quarter of fiscal 2015. Roughly 82% of all orders were generated from its website (versus 81% in the prior-year quarter).

Gross margin contracted 199 basis points (bps) year over year to 31.9% in the reported quarter. General and administrative expenses were up 4.9% year over year at $5.1 million, while there was an 8.2% decline in advertising expenses to $3.7 million. This led to a 1.1% reduction in adjusted operating expenses (without depreciation and discontinued project costs), which amounted to $8.9 million. Despite the fall, adjusted operating margin in the quarter contracted 8 bps to 15.9%.

PetMed exited fiscal 2016 with cash and cash equivalents and short-term investments of $37.6 million compared with $51.2 million in fiscal 2015. The company also declared an increase in its quarterly dividend to 19 cents per share, payable to shareholders on May 27, 2016.

Our Take

PetMed exhibited a better-than-expected performance in fourth-quarter fiscal 2016, exceeding the Zacks Consensus Estimate on both lines. After a series of continued drag in new order sales and sluggish reorder sales, the last two quarters saw a turnaround in both the numbers on the back of favorable unseasonal weather conditions.

We are, however, concerned about the pressure on margins despite the company’s ongoing cost-reduction initiatives. Moreover, lesser advertising raises concerns.

The company is presently trying to implement several strategies to revive its top line. These include focus on advertising efficiency to improve new order sales and shifting sales to higher margin items, while also expanding product offerings.

PetMed currently offers a wide range of products catering to dogs, cats and horses, and is working relentlessly on upgrading its existing portfolio. The stock presently sports a Zacks Rank #1 (Strong Buy).

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