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What Investors Can Expect from PetMed Express in 2017

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Part 3
What Investors Can Expect from PetMed Express in 2017 PART 3 OF 4

Factors Driving PetMed Express’s Net Profit Margins

PetMed Express’s profit margins

PetMed Express (PETS) reported healthy profit margins in fiscal 2017 due to the strength of its online business model. The company’s gross profit margin was 35.2%, and its net profit margin was 11.6% for fiscal 2Q18 compared to its gross margin of 29.7% and net margin of 9.1% for fiscal 2Q17.

The increase in profit margins can be attributed to an increase in high-margin product sales in the flea, tick, and heartworm categories.

Factors Driving PetMed Express’s Net Profit Margins

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In the previous three quarters of 2017, PetMed Express’s (PETS) net profit margins have risen 37.0%, 41.0%, and 79.2%, respectively. This is a significant improvement in performance, as PetMed Express’s revenues and earnings per share were sluggish from 2013 to 2016.

In 2017, PetMed Express changed its focus from TV advertising to online advertising. This shift helped reduce costs while reaching out to targeted customer segments.

Because the rising number of customers does not affect the fixed costs, PetMed Express’s margins have been increasing. The company also benefited from the shift in its focus from topical products to higher-margin oral products.

Competitive challenges

Wall Street analysts expect PetMed Express’s net profit margin to reach ~11.7% in fiscal 2018 compared to 9.7% in fiscal 2017. Peers Zoetis (ZTS), Patterson (PDCO), and Rite Aid (RAD) are expected to report net profit margins of 22.1%, 3.8%, and -0.3%, respectively.

PetMed Express operates in a mature animal health industry, with demand trends that are determined mainly by veterinarians. Competitor PetSmart has already announced its foray into online sales.

To maintain its position in the market, PetMed Express is expected to increase its advertising expenditures. This trend may have an adverse impact on the company’s margins in the coming year.

PetMed Express makes up about 0.07% of the iShares Russell 2000 Growth ETF’s (IWO) total portfolio holdings.

In the final part of this series, we’ll take a look at the key risk factors for PetMed Express.

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