PetMed Express, Inc. — Form 10-Q Summary
Business Context and Reporting Period
PetMed Express, Inc. operates a nationwide online pet pharmacy and sells prescription and non-prescription medications, health products, and supplies primarily to U.S. retail customers. The filing covers the three and nine months ended December 31, 2022, the third quarter and first nine months of fiscal 2023. Fiscal year-end is March 31.
Financial Performance and Key Metrics
| Metric | Three Months Ended Dec. 31 | Nine Months Ended Dec. 31 |
|---|---|---|
| Sales | $58.9 million, down 3.0% | $194.5 million, down 6.3% |
| Gross profit | $15.2 million; 25.9% margin | $53.6 million; 27.6% margin |
| Income from operations | $(0.8) million | $5.7 million |
| Net income | $(19 thousand); $(0.00) per diluted share | $5.3 million; $0.26 per diluted share |
| Adjusted EBITDA | $2.7 million, down 64% | $16.1 million, down 34% |
| Operating cash flow | Not separately provided | $18.1 million |
- Cost of sales was 74.1% of sales in the quarter and 72.4% for the nine-month period, compared with 70.8% and 71.7%, respectively, in the prior-year periods.
- General and administrative expense increased 38.2% in the quarter and 35.4% for the nine months, reflecting investments in personnel and systems, higher stock compensation, professional fees, severance, sales-tax accruals, and transaction costs.
- Advertising expense was $4.6 million in the quarter and $14.9 million for the nine months. Customer acquisition cost was $64 in the quarter and $74 for the nine months.
- Cash and cash equivalents were $102.4 million at December 31, 2022, compared with $111.1 million at March 31, 2022. Working capital was $102.9 million, down from $117.8 million.
- The Company had no debt obligations and reported no material outstanding lease commitments. Current liabilities were $31.1 million, principally accounts payable and accrued expenses.
- The Company paid $18.4 million in dividends during the first nine months and declared a subsequent quarterly dividend of $0.30 per share, estimated at approximately $6.3 million.
Material Changes Versus the Prior Comparable Period
- Quarterly sales declined $1.8 million, primarily due to higher seasonal discounts and competitive pressures. Nine-month sales declined $13.0 million, primarily due to higher costs to acquire new customers and competition.
- Reorder sales decreased 3.5% in the quarter and 4.5% for the nine months. New-order sales increased 1.8% in the quarter but decreased 20.8% for the nine months.
- Internet sales represented 86.8% of quarterly sales, up from 84.5% in the prior year, while contact-center sales decreased 17.5%.
- Gross margin declined 330 basis points in the quarter and 70 basis points for the nine months. Management attributed the quarterly decline primarily to higher promotions and rewards-program accrual changes, and the nine-month decline primarily to lower manufacturer rebates.
- Quarterly operating results moved from $5.1 million of operating income to $0.8 million of operating loss. Net income declined from $4.3 million to a $19 thousand loss.
- Operating cash flow increased to $18.1 million from $9.8 million, supported by inventory reductions, although net income declined.
- Investing cash use increased to $8.3 million from $1.3 million, including a $5.0 million investment for a 5% minority interest in Vetster and higher property and equipment purchases.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- AutoShip sales were 42% of net sales in the quarter, compared with 20% in the prior-year quarter and 39% sequentially. Management set a fiscal 2023 goal of approximately 50% of net sales from AutoShip.
- Management expects competition, price sensitivity, post-pandemic consumer behavior, and seasonal demand to make future sales difficult to predict. No formal revenue or earnings guidance was provided.
- On January 13, 2023, the Company agreed to acquire PetCareRx for approximately $36.0 million in cash, subject to adjustments and customary closing conditions, including state pharmacy license and permit filings. Closing was expected in the fourth quarter of fiscal 2023.
- The Company accrued approximately $0.9 million for a sales-tax assessment and is evaluating potential additional sales-tax exposure. Management stated that the evaluation, expected to be completed in the quarter ending March 31, 2023, could materially affect results.
- The Company accrued $364 thousand for severance under the former CFO’s transition and separation agreement.
- Quarterly effective tax rate was approximately 109.6%, compared with 22.9% in the prior-year quarter, due to the low level of pretax income, nondeductible expenses, and higher state taxes. The nine-month effective tax rate was 29.9%, compared with 23.4%.
- Other risks include supply-chain and shipping disruptions, inflation and consumer spending pressure, pharmacy and regulatory matters, sales-tax assessments, intellectual-property disputes, and execution risks related to the Vetster partnership and PetCareRx acquisition.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether declining sales, lower gross margins, and elevated operating expenses continue into the fourth quarter and fiscal 2024.
- The final scope and financial impact of the sales-tax exposure beyond the $0.9 million accrued amount.
- Whether the PetCareRx acquisition closes on expected terms and how the approximately $36.0 million cash consideration affects liquidity.
- Progress toward the approximately 50% AutoShip sales objective and its effect on retention, discounts, and margins.
- The sustainability of operating cash flow and the Company’s ability to fund dividends, capital expenditures, the acquisition, and any share repurchases without debt.
- The effect of recurring stock-based compensation, which totaled $5.0 million for the first nine months, on adjusted EBITDA and shareholder dilution.