PetMed Express, Inc. — Form 10-Q Summary
Business Context and Reporting Period
PetMed Express, Inc. operates a nationwide direct-to-consumer pet pharmacy and sells prescription and non-prescription medications, health products, and supplies primarily through its website and contact center. The filing covers the three months ended June 30, 2022, the first quarter of fiscal 2023. Results are unaudited and are not necessarily indicative of full-year performance.
Financial Performance and Position
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Sales | $70.2 million | $79.3 million | Down 11.5% |
| Gross profit | $19.9 million | $21.8 million | Down 8.4% |
| Gross margin | 28.4% | 27.5% | Up 0.9 percentage points |
| Operating income | $3.5 million | $5.4 million | Down 35.6% |
| Operating margin | 5.0% | 6.8% | Down 1.8 percentage points |
| Net income | $2.8 million | $4.4 million | Down 37% |
| Diluted EPS | $0.14 | $0.22 | Down $0.08 |
| Adjusted EBITDA | $6.3 million | $7.1 million | Down 10% |
| Operating cash flow | $6.4 million | $(0.4) million | Improved by $6.8 million |
- Cost of sales was $50.2 million, or 71.6% of sales, versus 72.5% in the prior-year quarter.
- General and administrative expense increased 16.3% to $9.4 million, primarily from higher payroll and stock-based compensation and increased professional fees.
- Advertising expense decreased 17.3% to $6.3 million, partly reflecting a delayed flea, tick, and heartworm season.
- Cash and cash equivalents were $105.4 million at June 30, 2022, compared with $111.1 million at March 31, 2022.
- Working capital was approximately $110.3 million, compared with $117.8 million at March 31, 2022.
- The company had no debt obligations and no material outstanding lease commitments.
- Dividends paid were $6.1 million; the quarterly dividend remained $0.30 per common share.
Material Changes Versus the Prior Comparable Period
- Sales declined $9.1 million, driven by lower reorder and new-order sales. Reorder sales fell 10.7% and new-order sales fell 18.2%.
- The company acquired approximately 69,000 new customers, compared with approximately 92,000 under the prior-year definition. Using the new 36-month definition for both periods, prior-year new customers would have been approximately 115,000.
- Internet sales represented 85.9% of revenue versus 83.8%; contact-center sales declined 23.1%.
- AutoShip sales averaged 34% of revenue during the quarter. Management set a goal of approximately 50% of fiscal 2023 sales through AutoShip.
- Gross margin improved because manufacturers shifted rebate funding toward reimbursement of promotional discounts supporting AutoShip.
- Share-based compensation increased to $1.5 million from $0.7 million, contributing to higher general and administrative expense and a higher effective tax rate.
- Operating cash flow improved mainly because of inventory reductions and working-capital movements, including a $9.9 million decrease in inventory and a $10.5 million decrease in accounts payable.
Outlook, Commentary, Risks, and Unusual Items
- Management cited a slow start to the seasonal flea, tick, and heartworm period, colder April weather, increased competition, price sensitivity, and changing post-pandemic consumer behavior as risks to sales.
- The company expects the fiscal 2023 effective tax rate to average approximately 24.5%, compared with 27.1% in the current quarter, subject to the reversal of certain stock-compensation-related effects.
- PetMed Express invested $5.0 million for a 5% minority interest in Vetster, a veterinary telehealth company, under a three-year partnership. The company became Vetster’s exclusive e-commerce provider, while Vetster became the exclusive telehealth provider to PetMed Express.
- The Vetster transaction generated a $355,000 investment banking fee included in adjusted EBITDA reconciliation. No Vetster-related revenue was recognized through June 30 because integration was completed after quarter-end.
- The company forecasts approximately $4.0 million of capital expenditures for the remainder of fiscal 2023, primarily for its e-commerce platform and information technology infrastructure, funded from operating cash flow.
- The board declared a $0.30 per share dividend on July 28, 2022, payable August 19, 2022, with an estimated total obligation of approximately $6.3 million.
- Christine Chambers was appointed chief financial officer effective August 3, 2022. The filing also discloses planned transition arrangements for outgoing CFO Bruce Rosenbloom.
- Legal proceedings were reported as none. The company noted continuing risks relating to pharmacy-board complaints, trademark litigation, shipping disruptions, supply-chain delays, seasonality, COVID-19 effects, and interest-rate and credit risk on cash investments.
- Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether sales and new-customer acquisition recover as flea, tick, and heartworm season progresses.
- Whether AutoShip adoption approaches management’s approximately 50% fiscal 2023 sales target and how the revised AutoShip calculation affects comparability.
- The financial contribution, integration status, and potential impairment risk of the Vetster investment.
- Whether gross-margin improvement from manufacturer rebate changes is sustainable.
- The impact of elevated stock-based compensation, professional fees, and the CFO transition on future operating expenses.
- Whether operating cash flow remains positive after dividends, Vetster investment spending, and planned capital expenditures.
- The sustainability of the $0.30 quarterly dividend and the intended use of the remaining approximately $28.7 million share-repurchase authorization.