October 19, 2009

PetSmart's 2008 share of the $43.2 billion pet market. The company owns 7% of the grooming and boarding market and 5% of the live animal market.

Pet Sector Strength a Mixed Blessing: Sector strength turned around and slapped PetMed in the face Monday, as its stock declined even though it met analyst expectations. A history of beating those expectations ended up hurting the online retailer. Even so, pet industry stars continued to shine.

NEW YORK -- Sector strength turned around and slapped PetMed in the face Monday, pushing its stock downward even though the online retailer had met analyst expectations. A history of beating those expectations ended up hurting the online retailer. But the sector's strength helped the brick-and-mortar megastore Petsmart, as well as as veterinary supply house MWI.

PetMed Express (Nasdaq: PETS), which sells pet and horse medications and supplies, closed at 17.7 at end of trading Monday, down almost 10 percent from Friday.

The 13-year-old Pompano Beach, Fla.-based company reaches customers directly via its 1-800-PetMeds toll free number and on the Internet through its website at 1800petmeds.com

PetMed Monday announced its second quarter ended Sept. 30 brought in net income of $6.3 million, or 28 cents per share, compared to $5.8 million, or 25 cents per share for the year-before quarter.

Despite the 12 percent EPS increase, investors were nonetheless disappointed, having been spoiled with better-than-expected earnings in eight quarters in a row according to Bob O'Brien, a blogster at Barron's wrote.

"The pet pharmacy concern has shown a penchant for beating estimates," he wrote on his "Stocks to Watch Today," blog on Barron's.com. "The most-glaring blemish, though, would have been the sales decline the company posted: sales missed, as it added fewer customers, new orders retreated and the dollar-value of the average order declined."

PetMed spent 10 percent less on advertising than formerly, which translated into weaker new customer and order growth. According to the company's president and chief executive officer, Menderes Akdag, the company only acquired about 233, 000 new customers during the quarter.

On the upside, costs to acquire a new customer decreased by eight percent to $33 for the quarter, compared to $36 for the year-before period.

Net sales for the quarter ended September 30 were $62.4 million, compared to $59.6 million for the year-before quarter, an increase of five percent.

"We are pleased to report that our operating expenses as a percent of sales improved by 200 basis points in the September quarter, compared to the same quarter in the prior year," Akdag said.

Veterinary Supply House Surges

Benefiting from an overall upward swing of the veterinary supply industry Monday, the MWI Veterinary Supply, Inc. (Nasdaq-MWIV), closed at 40.8 Monday, up 3.6 percent, close to is 52-week high of 42.4 in August.

The Meridian, Idaho-based company distributes animal health products such as pharmaceuticals, vaccines, flea medication, diagnostics, veterinary pet food, and nutritional products -- and, when medicine can do no more -- pet cremation services.

MWI has a year-over-year quarterly revenue growth of almost 19 percent. As of last year, the supply company had distributed about 30,000 products to approximately 19,000 veterinary practices.

PetSmart Benefits from Strong 2Q

Higher than expected profits and lower than expected expenses lifted PetSmart's third quarter outlook late last week. Shares of PetSmart Inc. (Nasdaq:PETM) climbed almost $2 a share late last week after the retailer raised third-quarter profit outlook.

PetSmart now expects 3rd-quarter earnings of between 25 cents and 29 cents, compared to its previously expected 20 cents to 24 cents per share.

The company said sales of its food categories have been "stable," and that it does expect store sales to be flat for the coming quarter. The retailer now expects earnings between $1.43 to $1.51 per share for the year.

In an attempt to cut expenses, PetSmart has reduced capital expenditures by about a third, from $294 million in 2007 to $120 million this year.

The pet megastore raised its 2009 earnings per share forecast to a range of $1.43 to $1.51 from previous estimates of $1.37 to $1.45.

PetSmart closed up 1/4 of a point Monday at 25.4 a share.

Gabrielle Jonas is the business correspondent for Zootoo Pet News.