PetMed Faces Concerns over New Order Sales, Competition

On Apr 6, we issued an updated research report on Pompano Beach, FL-based PetMed Express, Inc. (PETS - Free Report). The company, operating as 1-800-PetMeds, is a leading nationwide pet pharmacy.

PetMed's shares started going downhill post the mixed fiscal third-quarter results with earnings missing the Zacks Consensus Estimate and revenues beating the same. Per the last trading price, the company lost 7.15% as against 14.21% gain of the the Zacks categorized Internet - Commerce industry over the past three months.

We are also apprehensive about the pressure on margins despite the company’s cost-reduction initiatives. Furthermore, the decline in advertising costs raise concerns.

The company operates in a highly competitive and fragmented pet medications market. PetMed is currently witnessing higher pricing pressure in the over-the-counter market due to increased competition. To address the increasing competition in the flea and tick segment, PetMed adopted a more aggressive pricing strategy that affected its gross margin.

Also the acquisition of Novartis’ animal health division by Eli Lilly and Company has posed additional challenges for PetMed. The deal combined two large pet pharmacies with Eli Lilly moving to the second position in the animal health market in terms of global revenues. Undoubtedly, this market concentration has created an anti-competitive landscape for PetMed.

In the last four quarters, the company saw a turnaround on the back of a more aggressive pricing but new order sales continued to be disappointing.

Management is currently working on issues like limited consumer spending and a change in product mix to lower-priced items, mainly generics. The company is asking veterinarians to prescribe additional brands.

The company is presently trying to implement several strategies to revive its top line. PetMed is working on improving the effectiveness of its campaigns. It has started focusing on advertising efficiency to improve new order sales and shifting sales to higher margin items, including generics while expanding product offerings.

Although the company is optimistic about the latest increase in new order sales, the sustainability of this growth is still a matter of concern. Hence, we prefer to remain on the sidelines for the time being until future data is obtained on the same.

Zacks Rank & Key Picks

PetMed currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks within the broader Medical sector include Quidel Corporation (QDEL - Free Report) , Hologic, Inc. (HOLX - Free Report) , and Inogen, Inc. (INGN - Free Report) . All the three stocks sport a Zacks Rank #1(Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Quidel Corporation gained 27.90% in the last one year compared with the S&P 500’s gain of 14.68%. The company reported a stellar four-quarter positive average earnings surprise of 85.97%.

Hologic jumped 20.43% in the last one year compared with the S&P 500’s gain. Its four-quarter average earnings surprise was a positive 4.16%.

Inogen gained 64.23% in the past one year, better than the S&P 500 mark. It posted a trailing four-quarter positive average earnings surprise of 49.08%.