PetMed Express (Nasdaq:PETS) sells pet medications and related health products online and through a 1-800 number. Online sales make up close to 70% of sales and appear to be struggling in the face of intense competition in cyberspace. PetMed is being forced to ramp up advertising and lower prices to compete with larger online rivals and may struggle to remain competitive on its own. (Shopping from the comfort of your couch has major benefits and some unpleasant side effects. For more, see Shopping Online: Convenience, Bargains And A Few Scams.)  

Fourth Quarter Recap
Sales increased a modest 1.2% to $50.9 million. Sales related to customers refilling original orders grew 2.7% to reach $41.5 million, or 81.5% of total sales, and added about 130,000 new customers during the quarter. Gross profit fell 12.9% to $17.5 million, as the company lowered selling prices to remain competitive and operating income plummeted 33.8% to $6.4 million as the company had to ramp-up advertising to try and attract new customers.

Higher interest income helped temper the bottom-line decline as net income fell 31.7% to $4.1 million. Share buybacks also helped as earnings fell 29.6% to 19 cents per diluted share, but still fell below analyst expectations. (For more, see A Breakdown Of Stock Buybacks.) 

Full Year Review
Sales struggled, falling 2.8% to $231.6 million, as reorder sales increased 3.7% to account for 79.6% of sales. Gross profit fell 8.6% to $84 million. Operating income declined 18.5% to $33 million. Net income dropped 19.7% to $20.9 million while earnings declined 19.3% to 92 cents per diluted share.

The Bottom Line
PetMed summed up its last 12 months as a “challenging year, which can be attributed to increased customer acquisition costs and decreased new order sales due to increased competition, along with consumers giving greater consideration to price and a softer demand for some of the product categories we offer.”

A quick perusal of the competition helps explain the company’s current positioning in the industry. A sample of a six-pack package of flea and tick preventative medicine Frontline could be purchased for $74.98 on PetMed, around $100 from the online site of PetSmart (Nasdaq:PETM), $73.97 on Wal-Mart’s (NYSE:WMT) online site, and $69.99 on Amazon (Nasdaq:AMZN). So while PetMed stacks up well against retailers PetSmart and Wal-Mart, Amazon is much more competitive online.

This is just a brief sampling, but it calls into question PetMed’s ability to successfully compete online. After a string of rapid growth and an admittedly loyal customer base, it seems that winning new customers is becoming increasingly difficult and the company may have to work hard to keep costs close to Amazon, which will be difficult given Amazon’s huge clout with product suppliers. The likely solution would be an acquisition from PetSmart, or even veterinary firm VCA Antech (Nasdaq:WOOF) to shore up their own customer bases and better compete in cyberspace. (If online shopping is the problem, find other, non-shopping websites to occupy. For more, see 5 Ways To Control Emotional Spending.)

http://stocks.investopedia.com/stock-analysis/2011/Concerns-Over-PetMeds-Business-Moat-PETS-PETM-WMT-AMZN-WOOF0511.aspx