PetMed Express (NASDAQ:PETS) got off to a good start in 2020, with shares climbing more than 15% coming into this week. That's much better than the paltry 1% gain the stock delivered in 2019.

But what goes up can come down. PetMed Express announced its third-quarter results before the market opened on Tuesday, and the stock's decline of nearly 6% in early trading provided a big hint that the online pet pharmacy dropped the ball in Q3. Here are the highlights from PetMed's latest quarterly update.

Dog Dropping Ball

Image source: Getty Images.

By the numbers

PetMed Express reported third-quarter revenue of $59.9 million, a decrease from the prior-year period total of $60.1 million. It was also below the consensus Wall Street Q3 revenue estimate of $61.3 million.

Net income in the third quarter was $6.8 million, or $0.34 per share, based on generally accepted accounting principles (GAAP). This was lower than the prior-year period, when it reported net income of $7.8 million, or $0.38 per share. Analysts were expecting Q3 adjusted earnings of $0.30 per share.

PetMed ended the third quarter on Dec. 31 with cash, cash equivalents, and short-term investments of $92.4 million. This was a decrease from the $100.5 million on hand as of March 31, 2019.

Behind the numbers

In the Q3 conference call, CEO Menderes Akdag acknowledged that the company's sales "were relatively flat" in the third quarter. He didn't go into much detail as to why, but did note that "increased online competition negatively impacted our new order sales."

While sales were stagnant, PetMed's cost of sales increased nearly 4% year over year to $42.2 million. This caused the company's gross profit to shrink. It also offset PetMed's slightly lower operating costs compared with the prior-year period.

The company did have some good news in Q3. Both average order size and reorder sales increased. The average order size during the third quarter rose to $85, compared to last year's $84. Reorder sales were up by 1% to $53.8 million.

Looking ahead

Akdag said that PetMed Express expects that pet medication prices will stabilize throughout its online channel. He added that the company will "focus on optimizing our marketing in this more competitive environment and being more efficient with our advertising spend" in 2020. Akdag also said that PetMed will invest more in its e-commerce platform to improve its customer service.

When asked how much he thought the online channel would grow and what PetMed's share of that growth would be, Akdag replied, "It would be a guess, so I'm not going to guess." He did say, though, that he expected the market to continue the shift to the direct-to-consumer online channel, which would be good for PetMed Express.

With its dividend yielding close to 4% and uncertainty about how it will fare against stiff competition, investors should probably view PetMed as a relatively attractive dividend stock instead of a strong growth opportunity.