Piper Jaffray Upgrades PetMed Express (PETS) to Neutral

July 22, 2008 7:59 AM EDT

Piper Jaffray upgrades PetMed Express (NASDAQ: PETS) from Sell to Neutral and increases their price target from $11 to $14. The firm raises their FY 2009 EPS estimate from $0.89 to $0.92 to incorporate the Q1 earnings beat.. In addition, the firm incorporates "continued y/y increases in the cost to acquire new customers through the next two quarters albeit at a less significant rate than their prior model."

The firm said, "We were impressed with two key metrics in the quarter: (1) cost to acquire new customers +4.8% vs. our estimate calling for 12% growth and (2) new customer growth of 13.1% vs. our estimate calling for a 5% decline. Our thesis has been that a tight advertising environment during the presidential election cycle would limit PETS ability to buy attractive remnant advertising space, negatively affecting both new customer growth and cost to acquire metrics. While this appeared to play out in the March quarter, we believe a softer economy has mitigated much of the impact on advertising demand vs. previous election cycles and is likely to soften the impact for the rest of the calendar year
as well. Advertising spend was up a surprising 18.6% in the quarter as PetMed Express took advantage of spending opportunities, and the ratio of cost to acquire to new customer transaction size remained similar to Q1 of last year and was nearly 3% points stronger than in the March quarter."

Over the next few quarters, the firm believes it will be challenging given the presidential election and the timing of the Olympic games.

PetMed Express is an online retailer of pet medications and health products.

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