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Tickers in this Article: PETM, PETS
America's largest pet pharmacy, PetMed Express (PETS) reported earnings per share ("EPS") of 20 cents for the fourth quarter of fiscal 2012, a penny above the year-ago quarter and ahead of the Zacks Consensus Estimate of 18 cents. For the full year, EPS came in at 80 cents, a couple of cents ahead of the Zacks Consensus Estimate but well below the previous year's EPS of 92 cents. Net sales of PetMed increased 10% year over year to $55.9 million, surpassing the Zacks Consensus Estimate of $52 million. For the fiscal, sales growth was only 3% amounting to $238.3 million and surpassing the Zacks Consensus Estimate of $233 million.

The Florida based company added 162,000 new customers during the quarter compared with 132,000 in the fourth quarter of fiscal 2011. PetMed reported higher new order sales (up 22% year over year to $11.5 million), reorder sales (up 7% to $44.4 million) and online sales that climbed 16%. Approximately 76% of PetMed's orders were generated on the website compared with 73% in the corresponding year-ago quarter.

Despite an 8.5% rise in gross profit to $18.96 million, gross margin came down by 41 basis points (bps) to 33.9% during the quarter due to aggressive pricing and increased product cost.A 4.4% increase in general and administrative expenses (to $5.4 million) coupled with a 25.8% rise in advertising expenses (to $6.9 million) led to lower income from operations. Despite a rise in revenues, operating margin continued to languish at 11.9%, down 147 bps year over year. The average order size dropped to $76 during the quarter compared with $78 in the year-ago period due to aggressive pricing.

Although the cost to acquire a new customer remained almost flat at $43 ($42 in the year-ago quarter) PetMed would continue to advertise aggressively while expanding its product portfolio, including generic pet medications. Consequently, we expect operating margin to remain under pressure in the near future.

PetMed exited the fiscal with cash and cash equivalents of $46.8 million compared with $49.6 million at the end of March 2011. The company increased its quarterly dividend by 20% to 15 cents per share and repurchased approximately 2.1 million shares for $23.7 million during the fiscal.

PetMed offers a wide range of products for dogs, cats, and horses. The company markets its products primarily under well-known brands of medication such as Frontline Plus, K9 Advantix, Advantage, Heartgard Plus, Sentinel, and Interceptor, among others. The presence of players like PetSmart (PETM) makes the pet pharmacy market very competitive. To address competition, the company has adopted an aggressive pricing strategy that is hurting its margins. Moreover, higher advertising expenses took a hit on the bottom line. The stock retains a Zacks #4 Rank (Sell) in the short term.

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