PetMed Express reports slip in sales

Ad costs rise as consumer spending falls with the online pharmacy

Published: October 19, 2010
By Jennifer Fiala

PetMed Express — once believed by some to be an infallible player in the discount pet supply market — reports that net profits in the second quarter are down 21 percent.

Bad fiscal news for the nation's largest online pet pharmacy surfaced yesterday with the release of the company's quarterly report ending Sept. 30. The figures appear in sharp contrast with survey data from the American Pet Products Association, or APPA, that reveals discretionary spending for pets continues to climb nationally despite a depressed economy.

Documents filed with the U.S. Securities and Exchange Commission show that PetMed Express' financial difficulties can be pinned on a 10.6-percent increase in advertising expenses that total $8.6 million. Consumers also did some belt tightening, spending less with the company on medications and other pet goods, officials report.

At the same time, market research from the APPA, which tracks national spending trends, estimates that total U.S. expenditures for pet-related products and services will top $47.7 billion this year, up from $45.5 billion in 2009.

PetMed Express, commonly known as 1-800-PetMeds, made its online debut in 1996. Since then, the Pompano Beach-based company has been a thorn in the side of veterinarians, first selling prescription medications illegally and then working to undercut practitioners on sales of pet parasiticides that many suspect are acquired via gray market channels.

The company has never publicly revealed how it obtains products like Frontline and Sentinel, made by manufacturers with long-standing policies of selling all animal-health products only through licensed veterinarians. PetMed Express officials did not immediately respond to a request from the VIN News Service to discuss the company's financial status.

In the filing, PetMed Express CEO Menderes Akdag characterized the quarter as "challenging." He blamed the negative earnings on a blend of higher advertising costs and depressed sales tied to consumers giving greater consideration to prices.

Akdag writes: "Our online sales continued to increase by 4.1 percent to $43.9 million for the quarter compared to $42.2 million for the prior quarter, with approximately 72 percent of our orders being generated from our website during the quarter compared to 67 percent in the prior quarter. During the quarter we bought back approximately 222,000 shares of our own common shares for $3.5 million, and increased our quarterly dividend, from $0.10 per share to $0.125 per share, an increase of 25 percent. Our focus in fiscal 2011 continues to be conversion optimization and the expansion of our product offerings into pet supplies."

The advertising cost of acquiring a new customer often is "impacted by the advertising environment, the effectiveness of our advertising creative, increased advertising spending and price competition from veterinarians and other retailers of pet medications," company officials explain.

Shares of the online pharmacy dipped $0.36, or 2.29 percent, to $15.34 in midday trading on Tuesday.

According to PetMed Express' latest quarterly report, net revenue totaled $238.3 million for 2010, up from $219.4 million in 2009. This year's net operating expenses are reported at $40.5 million compared with $84.5 million last year.

Revenue for the three months ending Sept. 30 dipped to $61.2 million from $62.4 million for the quarter ending at the same time last year, representing a decrease of 1.9 percent. Net sales for the six months ending Sept. 30 were $135.6 million, representing a 2.9 percent year-over-year decrease.

PetMed Express has reported nearly $100 million growth in net revenue since 2006.

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