Yesterday, PetMed Express (NASDAQ:PETS), an online pet medication and supply company, saw its shares gain 33.74% on nearly 10 times the average daily volume. The company's shares skyrocketed in response to a better-than-expected fiscal second-quarter earnings report released before the opening bell Monday.

Can PetMed Express stock continue to head higher or should investors take profits after this sizable one-day gain? Let's break down the company's latest earnings report and long-term outlook to find out.

An elderly man high-fiving a dog at the kitchen table.

Image Source: Getty Images.

The good, the bad, and the ugly

The good: PetMed's second-quarter sales of $69.9 million barely topped FactSet's consensus estimate by a meager 0.28%. However, the company's Q2 net income of $6.7 million -- or $0.33 diluted per share -- clobbered FactSet's consensus estimate by a healthy 26%.

As part of this earnings release, PetMed's board of directors also declared a quarterly dividend of $0.27 per share payable on Nov. 15, 2019. That payout equates to a forward annual yield of 4.15% following yesterday's monstrous rally in the company's share price.

Lastly, PetMed exited the quarter with a respectable $94.9 million in cash and cash equivalents, $19.1 million in inventory, and zero debt. But that's arguably where the good news ends for this online pet retailer.

The bad: Despite these better-than-expected quarterly sales and earnings figures, PetMed's underlying business remains under serious pressure. Thanks to the entrance of new online retailers like Chewy and big-box retailers such as Costco and Target into the pet medication space, PetMed's Q2 sales actually fell by 2.1% year over year.

Another area of concern is the company's rapidly declining gross profit. Specifically, PetMed reported that Q2 gross profit, as a percent of sales, dropped to 28.6% from 35.4% relative to the same period a year ago. The company blamed increased pricing pressure from online competition for this sharp drop-off during the three-month period.

The ugly: PetMed boosted its spending on advertising by $1.4 million during the first six months of the current fiscal year, relative to the same period a year ago. Nonetheless, the company still couldn't stem the tide from a sales standpoint. That's not a promising sign in regards to the company's competitive positioning or long-term outlook. Wall Street, in fact, expects PetMed's top line to continue its downward trajectory for the remainder of the company's current fiscal year.

Verdict

PetMed has been one of the most heavily shorted equities stocks on the Nasdaq stock exchange over the prior 12 months, and for good reason. The long and short of it is that PetMed lacks the economy of scale necessary to compete with the likes of Costco, Target, and the overflowing sea of emerging online competitors. That's not a promising setup for long-term share-price appreciation.

The bottom line is that current shareholders may want to take some profits off the table in the wake of this double-digit rally. And for investors on the sidelines, it might be a good idea to simply sit this one out. It's never a wise move, after all, to buy a growth stock whose top line is moving in the wrong direction.