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Article by DailyStocks_admin    (05-22-08 06:24 AM)

The Daily Magic Formula Stock for 05/22/2008 is PetMed Express Inc. According to the Magic Formula Investing Web Site, the ebit yield is 12% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

General

PetMed Express, Inc. and subsidiaries, d/b/a 1-800- PetMeds, is a leading nationwide pet pharmacy. The Company markets prescription and non-prescription pet medications, and other health products for dogs, cats, and horses direct to the consumer. The Company offers consumers an attractive alternative for obtaining pet medications in terms of convenience, price, and speed of delivery.
The Company markets its products through national television, online, and direct mail/print advertising campaigns, which aim to increase the recognition of the "1- 800-PetMeds" brand name, increase traffic on its website at www.1800petmeds.com, acquire new customers, and maximize repeat purchases. Our fiscal year end is March 31, our executive offices are located at 1441 S.W. 29th Avenue, Pompano Beach, Florida 33069, and our telephone number is
(954) 979-5995. The information contained on the Company's website is not part of our Annual Report.

Our Products

We offer a broad selection of products for dogs, cats, and horses. These products include a majority of the well- known brands of medication, such as Frontline Plusr, K9 Advantixr, Advantager, Heartgard Plusr, Sentinelr, Interceptorr, Programr, Revolutionr, Deramaxxr, and Rimadylr. Generally, our prices are competitive with the prices for medications charged by veterinarians and retailers.

We research new products, and regularly select new products or the latest generation of existing products to become part of our product selection. In addition, we also refine our current products to respond to changing consumer- purchasing habits. Our website is designed to give us the flexibility to change featured products or promotions. Our product line provides customers with a wide variety of selections across the most popular health categories for dogs, cats, and horses. Our current products include:

Non-Prescription Medications (OTC): Flea and tick control products, bone and joint care products, vitamins and nutritional supplements, and hygiene products.

Prescription Medications (Rx): Heartworm treatments, thyroid and arthritis medications, antibiotics, and other specialty medications, as well as generic substitutes.

We offer our products through three main sales channels:
Internet through our website, telephone contact center through our toll-free number, and direct mail/print through the 1-800-PetMeds catalog and postcards. We have designed both our catalog and website to provide a convenient, cost- effective and informative shopping experience that encourages consumers to purchase products important for a pet's health and quality of life. We believe that these multiple channels allow us to increase the visibility of our brand name and provide customers with increased shopping flexibility and service.

Internet

We seek to combine our product selection and pet health information with the shopping ease of the Internet to deliver a convenient and personalized shopping experience. Our website offers health and nutritional product selections for dogs, cats, and horses, and relevant editorial and easily obtainable or retrievable resource information. From our home page, customers can search our website for products and access resources on a variety of information on dogs, cats, and horses. Customers can shop at our website by category, product line or individual product. We attracted approximately 14 million visitors to our website during fiscal year 2007, approximately 9% of those visitors placed an order, and our website generated approximately 62% of our total sales for the same time period.
In February 2006, we began sponsorship of a new website called "PetHealth101" which is located at www.PetHealth101.com. In PetHealth101, pet owners have access to health information covering pets' behavior and illnesses-and to the natural and pharmaceutical remedies specifically for a pet's problems. PetHealth101 is updated with the latest research for pet owners.

Telephone Contact Center

Our customer care representatives receive and process inbound customer calls, facilitate our outbound campaigns around maximizing customers' reorders, facilitate our live web chat, and process customer e-mails. Our telephone system is equipped with certain features including pop-up screens and call blending capabilities that give us the ability to efficiently utilize our customer care representatives' time, providing excellent customer care, service, and support. Our customer care representatives receive a base salary and are rewarded with commissions for sales, and bonuses and other awards for achieving certain goals.

Direct Mail/Print

The 1-800-PetMeds catalog is a full-color catalog that features our most popular products. The catalog is produced by a combination of in-house writers, production artists, and independent contractors. We mail catalogs and postcards in response to requests generated from our advertising and as part of direct mail campaigns to our customers.

Our Customers

Approximately 1,900,000 customers have purchased from us within the last two years. We attracted approximately 681,000 and 624,000 new customers in fiscal 2007 and 2006, respectively. Our customers are located throughout the United States, with approximately 50% of customers residing in California, Florida, Texas, New York, Pennsylvania, New Jersey, and Virginia.

While our primary focus has been on retail customers, we have also sold various non-prescription medications wholesale to a variety of businesses, including pet stores, groomers and traditional retailers in the United States. For the fiscal year ended March 31, 2007, the majority of our sales were made to retail customers with less than 1% of our sales made to wholesale customers. The average retail purchase was approximately $79 for fiscal 2007 compared to $77 for fiscal 2006.

Marketing

The goal of our marketing strategy is to build brand recognition, increase customer traffic, add new customers, build strong customer loyalty, maximize reorders, and develop incremental revenue opportunities. We have an integrated marketing campaign that includes television advertising, direct mail/print and e-mail, and online marketing.

Television Advertising

Our television advertising is designed to build brand equity, create brand awareness, and generate initial purchases of products via the telephone and the Internet. We have used :30 and :15 second television commercials to attract new customer orders. Our television commercials typically focus on our ability to rapidly deliver to customers the same medications offered by veterinarians, but at reduced prices. We generally purchase advertising on national cable channels to target our key demographic groups. We believe that television advertising is particularly effective and instrumental in building brand awareness.

In January 2007, we began featuring Betty White in our new 2007 advertising campaign, including in new commercials airing nationally. Ms. White speaks to pet owners from her home about the savings and convenience of purchasing the same exact pet medications from 1-800-PetMeds, compared to purchasing the medications from a veterinarian.

Direct Mail/Print and E-mail

We use direct mail/print and e-mail to acquire new customers and to remind our existing customers to reorder.

Online Marketing

We supplement our traditional advertising with online advertising and marketing efforts. We make our brand available to internet consumers by purchasing targeted keywords and achieving prominent placement on the top search engines and search engine networks, including Google, Microsoft Network, and Yahoo. We are also members of the LinkShare Network, which is an affiliate program with merchant clients and affiliate websites. This network is designed to develop and build a long-term, branded affiliate program in order to increase online sales and establish an Internet presence. The LinkShare Network enables us to establish link arrangements with other websites, as well as with portals and search engines.

Operations

Purchasing

We purchase our products from a variety of sources, including certain manufacturers, domestic distributors, and wholesalers. We have multiple suppliers for each of our products to obtain the lowest cost. We purchase the majority of our health and nutritional supplements directly from manufacturers. We believe having strong relationships with product manufacturers will ensure the availability of an adequate volume of products ordered by our customers, and will enable us to provide more and better product information. Historically, substantially all the major manufacturers of prescription and non-prescription medications have declined to sell these products to direct marketing companies. (See Risk Factors.) Part of our growth strategy includes developing direct relationships with the leading pharmaceutical manufacturers of the more popular prescription and non-prescription medications.

Order Processing

We provide our customers with toll-free telephone access to our customer care representatives. Our call center generally operates from 8:00 AM to 11:00 PM Monday through Thursday, 8:00 AM to 9:00 PM on Friday, 9:00 AM to 6:00 PM on Saturday, and 10:00 AM to 5:00 PM on Sunday, Eastern Standard Time. The process of customers purchasing products from 1-800-PetMeds consists of a few simple steps. A customer first places a call to our toll-free telephone number or visits our website. The following information is needed to process prescription orders: general pet information, prescription information, and the veterinarian's name and phone number. This information is entered into our computer system. Then our pharmacists and pharmacy technicians verify all prescriptions. The order process system checks for the verification for prescription medication orders and a valid payment method for all orders. An invoice is generated and printed in our fulfillment center, where items are picked for shipping. The product(s) in the customer's order are then selected from the Company's inventory and shipped via United States Priority Mail, United Parcel Service, or Federal Express. Our customers enjoy the convenience of rapid home delivery, with approximately 72% of all orders being shipped within 24 hours of ordering. Our website allows customers to easily browse and purchase substantially all of our products online. Our website is designed to be fast, secure, and easy to use with order and shipping confirmations, and with online order tracking-capabilities.

Warehousing and Shipping

We inventory our products and fill all customer orders from our 50,000 square foot facility in Pompano Beach, Florida. We have an in-house fulfillment and distribution operation, which is used to manage the entire supply chain, beginning with the placement of the order, continuing through order processing, and then fulfilling and shipping of the product to the customer. We offer a variety of shipping options, including next day delivery. We ship to anywhere in the United States served by the United States Postal Service, United Parcel Service, or Federal Express. Priority orders are expedited in our fulfillment process. Our goal is to ship the products the same day that the order is received. For prescription medications, our goal is to ship the product immediately after the prescription has been authorized by the customer's veterinarian.

Customer Service and Support

We believe that a high level of customer service and support is critical in retaining and expanding our customer base. Customer care representatives participate in ongoing training programs under the supervision of our training managers. These training sessions include a variety of topics such as product knowledge, computer usage, customer service tips, and the relationship between our Company and veterinarians. Our customer care representatives respond to customers' e-mails and calls that are related to order status, prices, and shipping. Our customer care representatives also respond to customers through our live web chat. If our customer care representatives are unable to respond to a customer's inquiry at the time of a call, we strive to provide an answer within 24 hours. We believe our customer care representatives are a valuable source of feedback regarding customer satisfaction. Our customer returns and credits average approximately 1.7 % of total sales.

Technology

We utilize integrated technologies in call center, e- commerce, order entry, and inventory control/fulfillment operations. Our systems are custom configured by the Company to optimize our computer telephone integration and mail-order processing. The systems are designed to maintain a large database of specialized information and process a large volume of orders efficiently and effectively. Our systems provide our agents with real time product availability information and updated customer information to enhance our customer service. We also have an integrated direct connection for processing credit cards to ensure that a valid credit card number and authorization have been received at the same time our customer care representatives are on the phone with the customer or when a customer submits an order on our website. Our information systems provide our customer care representatives with records of all prior contact with a customer, including the customer's address, phone number, e-mail address, fax number, prescription information, order history, payment history, and notes.

Competition

The pet medications market is competitive and highly fragmented. Our competitors consist of veterinarians, traditional retailers, and other mail-order and online retailers of pet medications and other health products. We believe that the following are the principal competitive factors in our market:

* Product selection and availability, including the availability of prescription and non-prescription medications;
* Brand recognition;
* Reliability and speed of delivery;
* Personalized service and convenience;
* Price; and
* Quality of website content.

We compete with veterinarians in the sale of prescription and non-prescription pet medications and other health products. Many pet owners may prefer the convenience of purchasing their pet medications or other health products at the time of a veterinarian visit, or may be hesitant to offend their veterinarian by not purchasing these products from the veterinarian. In order to effectively compete with veterinarians, we must continue to educate pet owners about the service, convenience, and savings offered by our Company.

According to the American Pet Products Manufacturers Association, pet spending in the United States increased 5.8% to $38.4 billion in 2006. Pet supplies and medications represented $9.3 billion, or 24% of the total spending on pets in the United States. The pet medication market size is estimated to be approximately $3.2 billion, with veterinarians having the majority of the market share. The dog and cat population is approximately 163 million, with approximately 63% of all households owning a pet.

We believe that the following are the main competitive strengths that differentiate 1-800-PetMeds from the competition:

* "1-800-PetMeds" brand name;
* Exceptional customer service and support;
* Consumer benefit structure of savings and convenience;
* Licensed pharmacy to conduct business in 50 states; and
* Multiple sources of supply of pet medications.

Intellectual Property
We conduct our business under the trade name "1-800- PetMeds." We believe this name, which is also our toll-free telephone number, has added significant value and is an important factor in the marketing of our products. We have also obtained the right to the Internet addresses www.1800petmeds.com, www.1888petmeds.com, www.petmedexpress.com,
and www.petmeds.com. As with phone numbers, we do not have and cannot acquire any property rights in an Internet address. We do not expect to lose the ability to use the Internet addresses; however, there can be no assurance in this regard and the loss of these addresses may have a material adverse effect on our financial position and results of operations. We are the exclusive owners of United States Trademark Registrations for "PetMed Express[R]," "1888PetMeds[R]," "1-800-PetMeds[R]," and "PetMeds[R]."

Government Regulation

Dispensing prescription medications is governed at the state level by the Board of Pharmacy, or similar regulatory agencies, of each state where prescription medications are dispensed. We are subject to regulation by the State of Florida and are licensed by the Florida Board of Pharmacy. Our current license is valid until February 28, 2009. We are also licensed and/or regulated by 49 other state pharmacy boards and other regulatory authorities including, but not necessarily limited to, the United States Food and Drug Administration ("FDA") and the United States Environmental Protection Agency . As a licensed pharmacy in the State of Florida, we are subject to the Florida Pharmacy Act and regulations promulgated thereunder. To the extent that we are unable to maintain our license as a community pharmacy with the Florida Board of Pharmacy, or if we do not maintain the licenses granted by other state pharmacy boards, or if we become subject to actions by the FDA, or other enforcement regulators, our distribution of prescription medications to pet owners could cease, which could have a material adverse effect on our operations.

Employees

We currently have 216 full time employees, including: 115 in customer care and marketing; 30 in fulfillment and purchasing; 59 in our pharmacy; 3 in information technology; 4 in administrative positions; and 5 in management. None of our employees are represented by a labor union, or governed by any collective bargaining agreements. We consider relations with our employees to be satisfactory.

CEO BACKGROUND

MENDERES AKDAG , age 46, has served as our Chief Executive Officer since March 2001 and as a member of our Board of Directors since November, 2002, and was appointed President in August 2005. Prior to joining PetMed Express, from November 2000 until March 2001, Mr. Akdag served as Chief Executive Officer of International Cosmetics Marketing Co. d/b/a Beverly Sassoon & Co., a publicly held (PS:SASN) direct sales company distributing skin care and nutritional products. From May 1991 until August 2000, Mr. Akdag was employed by Lens Express, Inc., a direct sales company distributing replacement contact lenses, serving as its President from May 1996 until August 2000, Chief Executive Officer and a member of the Board of Directors from August 1992 until May 1996, and Chief Financial Officer and a member of the Board of Directors from May 1991 until August 1992. On December 14, 1998, Netel Inc., a corporation in which Mr. Akdag served as a member of the Board of Directors, filed a Petition for Chapter 11 bankruptcy in the United States Bankruptcy Court Southern District of Florida. The proceeding was styled IN RE: NETEL, INC., CASE NO.98-28929-BKC-PGH. On July 19, 1999, the Bankruptcy Court entered an Order Confirming an Amended Chapter 11 Plan. On December 21, 1999, the Bankruptcy Court entered a Final Decree, Discharge of Trustee, and closed the case. Mr. Akdag holds a Bachelor of Science degree in Business Administration with a major in finance from the University of Florida.

FRANK J. FORMICA , age 63, has served as a member of our Board of Directors since August 2003. Mr. Formica has served as a legal consultant and expert in corporate securities and securities industry litigation and arbitration cases since 1999. From 1969 until 1999, Mr. Formica held various positions with the National Association of Securities Dealers (“NASD”), including Director of the NASD’s Congressional and State Liaison Department, Director of the Corporate Finance Department, and Vice President and Deputy General Counsel. Mr. Formica received his Juris Doctor degree from the Washington College of Law at American University and an undergraduate degree from Ohio University. He is a member of the New York State Bar.

GIAN M. FULGONI , age 59, has served as a member of our Board of Directors since November 2002. Mr. Fulgoni has been the Executive Chairman of comScore, Inc., formerly ComScore Networks, Inc., (NASDAQ:SCOR) since 1999. From 1981 until 1998, Mr. Fulgoni served as President and Chief Executive Officer of Information Resources, Inc. (NASDAQ: IRIC). He was a member of our Board of Directors from August 1999 through November 2000. Mr. Fulgoni served on the Board of Directors of Platinum Technology, Inc. from 1990 to 1999, U.S. Robotics, Inc. from 1991 to 1994, and Yesmail.com, Inc. in 1999. Educated in the United Kingdom, Mr. Fulgoni holds a Masters degree in Marketing from the University of Lancaster and a Bachelor of Science degree in Physics from the University of Manchester.

RONALD J. KORN , age 67, has served as a member of our Board of Directors since November 2002. Mr. Korn has been the President of Ronald Korn Consulting, a business consulting firm, since 1991. He served as the Managing Partner of KPMG, LLP’s Miami office from 1985 to 1991. Mr. Korn held various positions including Partner with KPMG, an international accounting firm, from 1961 until 1991. He has served as a Director and Chairman of the Audit Committee of Ocwen Financial Corporation (NYSE:OCN) since July 2003. He has also served as a Director and Chairman of the Audit Committee of comScore, Inc., formerly ComScore Networks, Inc., (NASDAQ:SCOR) since November, 2005. Mr. Korn previously served as a Director and Chairman of the Audit Committee of a number of public companies and a privately held financial institution. Mr. Korn holds a Juris Doctor degree from the New York University Law School and a Bachelor of Science degree in Economics from the University of Pennsylvania, Wharton School.

ROBERT C. SCHWEITZER , age 61, has served as a member of our Board of Directors since November 2002 and as Chairman of the Board since July 2006. Mr. Schweitzer has been the Florida Regional President for Northwest Savings Bank since October 2005 following the sale of Equinox Bank where he was President and Chief Executive Officer, to Northwest Savings. From June 2004 to March 2005 he was a consultant to Equinox Bank (formerly Horizon Bank), and became President and Chief Executive Officer of Equinox Bank in March 2005. Mr. Schweitzer was the Regional President of Union Planters Bank for Broward and Palm Beach County Florida markets from April 1999 to December 2002. Prior to joining Union Planters, Mr. Schweitzer served as the Executive Vice President and Head of Commercial Banking for Barnett Bank/NationsBank in Jacksonville, Florida from 1993 to 1999. Other positions held include Director and Head of Real Estate Consulting for Coopers & Lybrand in Washington, D.C.; Senior Vice President and Manager of Central North America Real Estate for the First National Bank of Chicago, and Manager of Domestic Credit Process Review; and Senior Vice President and Manager of Central North American Banking for Wachovia Bank. Mr. Schweitzer served in the United States Navy and Navy Reserve for 30 years, and retired with a rank of Captain. Mr. Schweitzer holds a Masters degree in Business Administration from the University of North Carolina, and a Bachelor of Science degree from the United States Naval Academy.

BRUCE S. ROSENBLOOM, age 38, was appointed Chief Financial Officer in May 2001. Mr. Rosenbloom served as the Manager of Finance and Financial Reporting of Cooker Restaurant Corporation, a publicly held (PS: CGRTQ) restaurant, in West Palm Beach, Florida, from December 2000 until May 2001. Mr. Rosenbloom's duties included all internal and external reporting including all SEC filings and Annual Reports to Shareholders. Mr. Rosenbloom was a senior audit accountant for Deloitte & Touche LLP, an international accounting firm, West Palm Beach, Florida, from January 1996 until December 2000. Mr. Rosenbloom was responsible for planning and conducting all aspects of audit engagements for clients in various industries, including direct marketing, healthcare, manufacturing, financial institutions, and professional service firms. From August 1992 to May 1995, Mr. Rosenbloom was an Account Executive for MCI Telecommunications. Mr. Rosenbloom, a certified public accountant, received a Bachelor of Science degree in Accounting from Florida Atlantic University, Boca Raton, Florida in 1996 and a Bachelor of Arts degree in Economics from the University of Texas, Austin, Texas in 1992.

MANAGEMENT DISCUSSION FROM LATEST 10K

Executive Summary

PetMed Express was incorporated in the state of Florida in January 1996. The Company's common stock is traded on the NASDAQ Global Select Market under the symbol "PETS." The Company began selling pet medications and other pet health products in September 1996, and issued its first catalog in the fall of 1997. This catalog displayed approximately 1,200 items, including prescription and non- prescription pet medications, other pet health products, and pet accessories. In fiscal 2001, the Company focused its product line on approximately 600 of the most popular pet medications and other health products for dogs and cats. Presently, the Company's product line includes approximately 750 of the most popular pet medications and other health products for dogs, cats, and horses.

The Company markets its products through national television, online, and direct mail/print advertising campaigns which direct consumers to order by phone or on the Internet, and aim to increase the recognition of the "1-800- PetMeds" brand name. Currently, approximately 62% of all sales are generated via the Internet compared to 57% last year.

The Company's sales consist of products sold mainly to retail consumers and minimally to wholesale customers. Typically, the Company's customers pay by credit card or check at the time the order is shipped. The Company usually receives cash settlement in two to three banking days for sales paid by credit cards, which minimizes the accounts receivable balances relative to the Company's sales. The Company's sales returns average was approximately 1.7 % and 1.5 % of sales for the fiscal years ended March 31, 2007 and 2006, respectively. The twelve-month average purchase was approximately $79 and $77 per order for the fiscal years ended March 31, 2007 and 2006, respectively.

Critical Accounting Policies

Our discussion and analysis of our financial condition and the results of our operations are based upon our consolidated financial statements and the data used to prepare them. The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. On an ongoing basis we re-evaluate our judgments and estimates including those related to product returns, bad debts, inventories, long-lived assets, income taxes, litigation and contingencies. We base our estimates and judgments on our historical experience, knowledge of current conditions, and our beliefs of what could occur in the future considering available information. Actual results may differ from these estimates under different assumptions or conditions. Our estimates are guided by observing the following critical accounting policies.

Revenue recognition

The Company generates revenue by selling pet medication products primarily to retail consumers and minimally to wholesale customers. The Company's policy is to recognize revenue from product sales upon shipment, when the rights of ownership and risk of loss have passed to the customer. Outbound shipping and handling fees are included in sales and are billed upon shipment. Shipping expenses are included in cost of sales.

The majority of the Company's sales are paid by credit cards and the Company usually receives the cash settlement in two to three banking days. Credit card sales minimize accounts receivable balances relative to sales. The Company maintains an allowance for doubtful accounts for losses that the Company estimates will arise from the customers' inability to make required payments, arising from either credit card charge-backs or insufficient funds checks. The Company determines its estimates of the uncollectibility of accounts receivable by analyzing historical bad debts and current economic trends. At March 31, 2007 and 2006 the allowance for doubtful accounts was approximately $28,000 and $23,000, respectively.

Valuation of inventory

Inventories consist of prescription and non-prescription pet medications and pet supplies that are available for sale and are priced at the lower of cost or market value using a weighted average cost method. The Company writes down its inventory for estimated obsolescence. The inventory reserve was approximately $122,000 and $306,000 for the fiscal years ended March 31, 2007 and 2006, respectively.

Property and equipment

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. The furniture, fixtures, equipment, and computer software are depreciated over periods ranging from three to seven years. Leasehold improvements and assets under capital lease agreements are amortized over the shorter of the underlying lease agreement or the useful life of the asset.

Long-lived assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of the asset to net future cash flows expected to be generated from the asset.

Advertising

The Company's advertising expense consists primarily of television advertising, internet marketing, and direct mail/print advertising. Television costs are expensed as the advertisements are televised. Internet costs are expensed in the month incurred and direct mail/print advertising costs are expensed when the related catalog and postcards are produced, distributed, or superseded.

Accounting for income taxes

The Company accounts for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes, which generally requires recognition of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting carrying values and the tax bases of assets and liabilities, and are measured by applying enacted tax rates and laws for the taxable years in which those differences are expected to reverse.

Results of Operations

The following should be read in conjunction with the Company's Consolidated Financial Statements and the related notes thereto included elsewhere herein.

Fiscal 2007 Compared to Fiscal 2006
Sales

Sales increased $24,663,000, or 17.9%, to $162,246,000 for the year ended March 31, 2007, from $137,583,000 for the fiscal year ended March 31, 2006. The increase in sales can be primarily attributed to increased retail reorders and new orders, offset by decreased wholesale sales, during the fiscal year.

The Company has committed certain amounts specifically designated towards television, direct mail/print and online advertising to stimulate sales, create brand awareness, and acquire new customers. Retail reorder sales have increased by approximately $22,173,000, or 25.1%, to approximately $110,540,000 for the fiscal year ended March 31, 2007, from approximately $88,367,000 for the fiscal year ended March 31, 2006. Retail new order sales have increased by approximately $5,608,000, or 12.3%, to approximately $51,096,000 for the fiscal year ended March 31, 2007, from approximately $45,488,000 for the fiscal year ended March 31, 2006. Wholesale sales have decreased by approximately $3,118,000, or 83.6%, to approximately $610,000 for the fiscal year ended March 31, 2007, from approximately $3,728,000 for the fiscal year ended March 31, 2006. We limited our wholesale sales in fiscal 2007 and we may limit future wholesale sales to continue to focus our business on retail sales. The Company acquired approximately 681,000 new customers for the fiscal year ended March 31, 2007, compared to 624,000 new customers for the same period in the prior year. There can be no assurances that this growth trend will continue due to increased price competition from veterinarians and traditional and online retailers.

The majority of our product sales are affected by the seasons, due to the seasonality of mainly heartworm and flea and tick medications. For the quarters ended June 30, September 30, December 31, and March 31 of fiscal 2007, the Company's sales were approximately 31%, 27%, 19%, and 23%, respectively.
Cost of sales

Cost of sales increased by $14,436,000, or 17.3%, to $97,680,000 for the fiscal year ended March 31, 2007, from $83,244,000 for the fiscal year ended March 31, 2006. The increase in cost of sales is directly related to the increase in retail sales in fiscal 2007 as compared to fiscal 2006. As a percent of sales, the cost of sales was 60.2% in fiscal 2007, as compared to 60.5% in fiscal 2006. The percentage decrease can be mainly attributed to a decrease in our wholesale sales, which had a higher cost of sales percentage, and due to a shift in our product mix to higher gross profit margin items, offset by additional price discounts given to customers.
Gross profit

Gross profit increased by $10,227,000, or 18.8%, to $64,566,000 for the fiscal year ended March 31, 2007, from $54,339,000 for the fiscal year ended March 31, 2006. Gross profit as a percentage of sales for fiscal 2007 and 2006 was 39.8% and 39.5%, respectively. The gross profit percentage increase can be mainly attributed to a decrease in our wholesale sales, which had a lower gross profit percentage, and due to a shift in our product mix to higher gross profit margin items, offset by additional price discounts given to customers.
General and administrative expenses

General and administrative expenses increased by $3,215,000, or 22.8%, to $17,293,000 for the fiscal year ended March 31, 2007 from $14,078,000 for the fiscal year ended March 31, 2006. General and administrative expenses as a percentage of sales was 10.6% compared to 10.2% for the fiscal years ended March 31, 2007 and 2006, respectively. The increase in general and administrative expenses for the fiscal year ended March 31, 2007 was primarily due to the following: a $2,194,000 increase to payroll expenses, with $893,000 of the increase due to the recognition of stock option compensation expense during the period relating to the implementation of SFAS 123R, " Share Based Payment," and the remaining increase attributed to the addition of new employees in the customer care and pharmacy departments enabling the Company to sustain its growth; a $530,000 increase to credit card and bank service fees which is directly attributable to increased sales in the fiscal year; a $260,000 increase to licenses and fees, the majority of the increase relating to the first time compliance with a California mill assessment fee on certain products sold in that state; a $169,000 increase to property expenses relating to additional rent due to our warehouse expansion; a $125,000 increase to office expenses which can be directly attributed to increased sales; a $105,000 increase to telephone expenses resulting from receiving one-time usage credits during the prior fiscal year; a $87,000 increase to insurance expenses, relating to an increase in premiums paid; and a $36,000 increase to other expenses which includes bad debt and travel expenses. Offsetting the increase was a $162,000 one-time charge, relating to state/county sales tax, which was not collected on behalf of customers, which was booked in the first quarter of fiscal 2006; and a $129,000 decrease in professional fees, primarily relating to the reduction of legal fees and Sarbanes-Oxley compliance fees.

Advertising expenses

Advertising expenses increased by approximately $3,672,000, or approximately 17.0%, to approximately $25,243,000 for the fiscal year ended March 31, 2007 from approximately $21,571,000 for the fiscal year ended March 31, 2006. The increase in advertising expenses for the fiscal year ended March 31, 2007 was due to the Company's plan to commit certain amounts specifically designated towards television, direct mail/print, and online advertising to stimulate sales, create brand awareness, and acquire new customers.

The advertising cost of acquiring a new customer, defined as total advertising cost divided by new customers acquired, for the fiscal year ended March 31, 2007 was $37, compared to $35 for the same period the prior year. Advertising cost of acquiring a new customer can be 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. Historically, the advertising environment fluctuates due to supply and demand. A less favorable advertising environment may negatively impact future new order sales. As a percentage of sales, advertising expense was 15.6% in fiscal 2007, as compared to 15.7% in fiscal 2006. The Company currently anticipates advertising as a percentage of sales to range from approximately 14.0% to 16.0% in fiscal 2008. However, the advertising percentage will fluctuate quarter to quarter due to seasonality and advertising availability. For the fiscal year ended March 31, 2007, quarterly advertising expenses as a percentage of sales ranged between 12% and 18%.
Depreciation and amortization

Depreciation and amortization decreased by approximately $15,000, or 2.6%, to approximately $530,000 for the fiscal year ended March 31, 2007 from approximately $545,000 for the fiscal year ended March 31, 2006. This decrease to depreciation and amortization expense for fiscal 2007 can be attributed to the fact that existing property and equipment items have been fully depreciated.
Other income

Other income increased by approximately $811,000, or 91.1%, to approximately $1,701,000 for the fiscal year ended March 31, 2007, from approximately $890,000 for the fiscal year ended March 31, 2006. The increase to other income can be primarily attributed to increased interest income due to increases in the Company's cash balance, which is swept into an interest bearing overnight account, and a tax-free short term investment account. The increase can also be attributed to additional advertising revenue generated from our website. Interest income may decrease in future years if the Company utilizes its cash balances on its $20,000,000 share repurchase plan or on its operating activities.
Provision for income taxes

For the fiscal years ended March 31, 2007 and 2006, the Company recorded an income tax provision for approximately $8,757,000 and $6,972,000, respectively, which resulted in an effective tax rate of 37.7% and 36.6%, respectively.
Net income

Net income increased by approximately $2,380,000, or 19.7%, to approximately $14,444,000 for the fiscal year ended March 31, 2007 from approximately $12,064,000 for the fiscal year ended March 31, 2006. The increase was mainly attributable to the Company's sales growth and profitable operations.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Three Months Ended December 31, 2007 Compared With Three Months Ended December 31, 2006, and Nine Months Ended December 31, 2007 Compared With Nine Months Ended December 31, 2006
Sales

Sales increased by approximately $5,997,000, or 19.1%, to approximately $37,349,000 for the quarter ended December 31, 2007, from approximately $31,352,000 for the quarter ended December 31, 2006. For the nine months ended December 31, 2007, sales increased by approximately $22,075,000, or 17.5%, to approximately $147,913,000 compared to sales of approximately $125,838,000 for the nine months ended December 31, 2006.

The increase in sales for the three months ended December 31, 2007 was primarily due to increased retail reorders and for the nine months ended December 31, 2007, the increase in sales can be attributed primarily to increased retail reorders and new orders, offset by decreased wholesale sales. The Company has committed certain dollars amounts specifically designated towards television, direct mail/print and online advertising to stimulate sales, create brand awareness, and acquire new customers. The Company acquired approximately 127,000 new customers for the quarter ended December 31, 2007, compared to approximately 130,000 new customers for the same period the prior year. The decrease in new customer orders for the quarter ended December 31, 2007 can be directly related to a 13% reduction in advertising expenses during the quarter. For the nine months ended December 31, 2007, the Company acquired approximately 585,000 new customers, compared to approximately 549,000 new customers for the same period the prior year. There can be no assurances that this growth trend will continue, due to increased price competition from veterinarians and traditional and online retailers.

Leading up to the 2004 presidential elections we experienced an increase in the advertising cost of acquiring a new customer and a decrease in new customer sales, which may have been attributed to a shortage of television advertising inventory. There can be no assurances that the 2008 presidential elections will not have a similar impact on the advertising cost of acquiring a new customer and new customer sales.

The majority of our product sales are affected by the seasons, due to the seasonality of mainly heartworm and flea and tick medications. For the quarters ended June 30, September 30, December 31, and March 31 of fiscal 2007, the Company's sales were approximately 31%, 27%, 19%, and 23%, respectively.
Cost of sales

Cost of sales increased by approximately $3,613,000, or 19.5%, to approximately $22,176,000 for the quarter ended December 31, 2007, from approximately $18,563,000 for the quarter ended December 31, 2006. For the nine months ended December 31, 2007, cost of sales increased by approximately $14,388,000, or 18.9%, to approximately $90,391,000 compared to cost of sales of approximately $76,003,000 for the nine months ended December 31, 2006. The increase in cost of sales for the three and nine months ended December 31, 2007 is directly related to the increase in sales. As a percent of sales, the cost of sales was 59.4% and 59.2% for the three months ended December 31, 2007 and 2006, respectively, and for the nine months ended December 31, 2007 and 2006, cost of sales was 61.1% and 60.4%, respectively. The percentage increases can be attributed to increases in our product and freight costs.
Gross profit

Gross profit increased by approximately $2,384,000, or 18.6%, to approximately $15,173,000 for the quarter ended December 31, 2007, from approximately $12,789,000 for the quarter ended December 31, 2006. For the nine months ended December 31, 2007, gross profit increased by approximately $7,687,000, or 15.4%, to approximately $57,523,000 compared to gross profit of approximately $49,836,000 for the nine months ended December 31, 2006. Gross profit as a percentage of sales was 40.6% and 40.8% for the three months ended December 31, 2007 and 2006, respectively, and for the nine months ended December 31, 2007 and 2006 gross profit as a percentage of sales was 38.9% and 39.6%, respectively. The percentage decreases can be attributed to increases in our product and freight costs.
General and administrative expenses

General and administrative expenses increased by approximately $520,000, or 12.9%, to approximately $4,543,000 for the quarter ended December 31, 2007, from approximately $4,023,000 for the quarter ended December 31, 2006. For the nine months ended December 31, 2007, general and administrative expenses increased by approximately $2,710,000, or 21.2%, to approximately $15,502,000 compared to approximately $12,792,000 for the nine months ended December 31, 2006. The increase in general and administrative expenses for the three months ended December 31, 2007 was primarily due to the following: a $363,000 increase to payroll expenses, with $157,000 of the increase due to the recognition of additional stock based compensation expense during the quarter relating to the issuance of restricted stock and stock options, with $67,000 of the increase due to withholding tax expense relating to restricted stock issuances in fiscal 2007 and 2008, and the remaining amount attributed to the addition of new employees in the customer care and pharmacy departments enabling the Company to sustain its growth; a $210,000 increase to bank service and credit card fees which can be directly attributed to increased sales in the quarter; a $56,000 increase to office expenses which can be directly attributed to increased sales for the quarter; a $21,000 increase to licenses and fees relating to a quarterly California mill assessment on flea and tick products; and a $19,000 increase in other expenses which includes mainly property expenses. Offsetting the increase was a $62,000 decrease to insurance expenses relating to decreased insurance premiums in the quarter; a $48,000 decrease to professional fees relating to a decrease in legal fees in the quarter; and a $39,000 decrease to telephone and travel-related expenses.

The increase in general and administrative expenses for the nine months ended December 31, 2007 was primarily due to the following: a $1,527,000 increase to payroll expenses, with $460,000 of the increase due to the recognition of additional stock based compensation expense during the nine months relating to the issuance of restricted stock and stock options, with $228,000 of the increase due to withholding tax expense relating to restricted stock issuances in fiscal 2007 and 2008, and the remaining amount attributed to the addition of new employees in the customer care and pharmacy departments enabling the Company to sustain its growth; a $584,000 increase to bank service and credit card fees which can be directly attributed to increased sales for the nine months; a $386,000 one-time charge due to the fact that nexus was established in another state, relating to state/county sales tax which was not collected on behalf of our customers in fiscal 2007; a $130,000 increase to office expenses which can be directly attributed to increased sales for the nine months; a $122,000 increase to licenses and fees relating to a quarterly California mill assessment on flea and tick products; and a $63,000 increase in other expenses which includes property expenses and professional fees, with a $58,000 decrease to telephone expenses, a $26,000 decrease to travel-related expenses, and an $18,000 decrease to insurance expenses offsetting the increase.
Advertising expenses

Advertising expenses decreased by approximately $601,000, or 12.6%, to approximately $4,170,000 for the quarter ended December 31, 2007, from approximately $4,771,000 for the quarter ended December 31, 2006. For the nine months ended December 31, 2007, advertising expenses decreased slightly by approximately $46,000, or 0.2%, to approximately $20,725,000 compared to advertising expenses of approximately $20,771,000 for the nine months ended December 31, 2006. As a percentage of sales, advertising expense was 11.2% and 15.2% for the three months ended December 31, 2007 and 2006, respectively, and 14.0% and 16.5% for the nine months ended December 31, 2007 and 2006, respectively. The decrease in advertising expense for the quarter can be attributed to decreased television advertising due to a shortage of television advertising inventory as compared to last year for the same quarter. The advertising cost of acquiring a new customer, defined as total advertising costs divided by new customers acquired, was $33 for the quarter ended December 31, 2007, compared to $37 for the quarter ended December 31, 2006, and for the nine months ended December 31, 2007, the advertising cost of acquiring a new customer was $35 compared to $38 for the same period in the prior year. The Company currently anticipates advertising as a percentage of sales to be approximately 14.0% for fiscal 2008. However, the advertising percentage will fluctuate quarter to quarter due to seasonality and advertising availability. For the fiscal year ended March 31, 2007, quarterly advertising expenses as a percentage of sales ranged between 12% and 18%.
Depreciation and amortization expenses

Depreciation and amortization expenses increased by approximately $26,000, or 20.1%, to approximately $155,000 for the quarter ended December 31, 2007, from approximately $129,000 for the quarter ended December 31, 2006. Depreciation and amortization expenses increased by approximately $39,000, or 10.0%, to approximately $435,000 for the nine months ended December 31, 2007, from approximately $396,000 for the nine months ended December 31, 2006. This increase to depreciation and amortization expense for the quarter and nine months ended December 31, 2007 can be attributed to new property and equipment additions in fiscal 2008.
Other income

Other income increased by approximately $141,000 to approximately $565,000 for the quarter ended December 31, 2007, from approximately $424,000 for the quarter ended December 31, 2006. For the nine months ended December 31, 2007, other income increased by approximately $615,000 to approximately $1,863,000 compared to other income of approximately $1,248,000 for the nine months ended December 31, 2006. The increase to other income for the three and nine months ended December 31, 2007 can be attributed primarily to increased interest income due to increases in the Company's cash balance, which is swept into an interest-bearing overnight account and a tax-free short term investment account. The increase can also be attributed to additional advertising revenue generated from our website. Interest income may decrease in the future if there is a decline in interest rates or if the Company utilizes its cash balances on its $20,000,000 share repurchase plan, with approximately $15,131,000 remaining, or on its operating activities.
Provision for income taxes

For the quarters ended December 31, 2007 and 2006, the Company recorded an income tax provision for approximately $2,460,000 and $1,535,000, respectively, and for the nine months ended December 31, 2007 and 2006, the Company recorded an income tax provision of approximately $7,605,000 and $6,306,000, respectively. The income tax provision for the nine months ended December 31, 2007 includes a tax benefit of approximately $308,000 which relates to an income tax over-accrual for the fiscal year ended March 31, 2007. During the first quarter of fiscal 2008, it was determined that the Company was no longer a full tax payer in the state of Florida, due to the fact that it established nexus in another state. This event triggered a lower effective tax rate in the year ended March 31, 2007 and for future quarters.

The Company also recognized a $155,000 income tax benefit due to the disqualifying disposition of certain incentive stock option exercises during the nine months ended December 31, 2007. These events resulted in an effective tax rate of 35.8% for both of the quarters ended December 31, 2007 and 2006, and an effective tax rate of 33.5% and 36.8% for the nine months ended December 31, 2007 and 2006, respectively. For the remainder of fiscal 2008, the Company estimates its effective tax rate to be approximately 1.5% less than it was in fiscal 2007.

Liquidity and Capital Resources

The Company's working capital at December 31, 2007 and March 31, 2007 was $64,565,000 and $50,613,000, respectively. The $13,952,000 increase in working capital was primarily attributable to cash flow generated from operations, the exercise of stock options, and interest income earned on temporary investments, offset by stock repurchased for the nine months ended December 31, 2007. Net cash provided by operating activities was $9,863,000 and $15,111,000 for the nine months ended December 31, 2007 and 2006, respectively, and the $5,248,000 decrease can be attributed to an increase in inventory and a decrease in account payables. Net cash used in investing activities was $6,087,000 and $16,074,000 for the nine months ended December 31, 2007 and 2006, respectively. This $9,987,000 decrease can be attributed to a lesser amount of purchases of temporary investments in fiscal 2008. Net cash used in financing activities was $1,952,000 for the nine months ended December 31, 2007, and net cash provided by financing activities was $666,000 for the nine months ended December 31, 2006. During the nine months ended December 31, 2007, the Company received approximately $2,649,000 upon the exercise of 275,941 stock option shares and the Company repurchased approximately 369,500 shares of its common stock for approximately $4,869,000.

As of both December 31, 2007 and 2006 the Company had no outstanding lease commitments except for the lease for its executive offices and warehouse. The Company had financed certain equipment acquisitions with capital leases. The Company has approximately $200,000 planned for capital expenditure commitments to further the Company's growth during fiscal 2008, which will be funded through cash from operations. The lease for our corporate office and distribution facility in Pompano Beach expires in May 2009. Therefore the Company expects to allocate capital funds for new property leasehold and equipment additions during fiscal 2009 to address growth needs for the next five years. The Company's source of working capital includes cash from operations, interest income on temporary investments, and the exercise of stock options. The Company presently has no need for other alternative sources of working capital, and has no commitments or plans to obtain additional capital.

Cautionary Statement Regarding Forward-Looking Information

Certain information in this Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward- looking statements by the words "believes," "intends," "expects," "may," "will," "should," "plans," "projects," "contemplates," "budgets," "predicts," "estimates," "anticipates," or similar expressions. These statements are based on our beliefs, as well as assumptions we have used based upon information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties and assumptions. Actual future results may differ significantly from the results discussed in the forward-looking statements. A reader, whether investing in our common stock or not, should not place undue reliance on these forward-looking statements, which apply only as of the date of this quarterly report. When used in this quarterly report on Form 10-Q, "PetMed Express," "1-800- PetMeds," "PetMed," "1-888-PetMeds," "PetMed Express.com," "the Company," "we," "our," and "us" refers to PetMed Express, Inc. and our subsidiaries.

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