PetMed Express, Inc. 10-Q Summary
Business Context and Reporting Period
PetMed Express, Inc. operates the 1-800-PetMeds nationwide pet pharmacy, selling prescription and non-prescription medications, health products, and supplies primarily to U.S. consumers through Internet and contact-center channels. The filing covers the three and six months ended September 30, 2020, the second quarter and first half of fiscal 2021. Financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Six Months Ended September 30 |
|---|---|---|
| Sales | $75.4 million, up 7.9% | $171.6 million, up 14.5% |
| Gross profit | $23.0 million; 30.5% margin | $49.8 million; 29.0% margin |
| Income from operations | $10.5 million; 13.9% margin | $19.9 million; 11.6% margin |
| Net income | $8.4 million, versus $6.7 million | $16.2 million, versus $12.0 million |
| Diluted EPS | $0.42, versus $0.33 | $0.81, versus $0.60 |
| Operating cash flow | Not separately provided | $15.2 million, versus $17.3 million |
- Cost of sales was 69.5% of sales in the quarter and 71.0% for the six-month period, improving from 71.4% and 72.1%, respectively.
- Total operating expenses were $12.5 million in the quarter and $29.9 million for the six months. Advertising represented 6.8% of quarterly sales and 8.3% of year-to-date sales.
- Cash and cash equivalents were $106.3 million at September 30, 2020, compared with $103.8 million at March 31, 2020. Virtually all cash was invested in money market funds.
- The company reported no debt obligations, no material outstanding lease commitments, and no off-balance-sheet arrangements.
- Working capital was $111.5 million, compared with $104.7 million at March 31, 2020.
- Dividends paid during the first six months totaled $11.4 million. A $0.28-per-share dividend was declared on October 26, 2020, with an estimated payable of approximately $5.7 million.
Material Changes Versus the Prior Comparable Period
- Quarterly sales growth was driven by reorder sales, which rose 9.6% to $67.8 million; new-order sales declined 5.1% to $7.7 million. For the six months, reorder sales increased 14.3% and new-order sales increased 15.4%.
- Internet sales increased 7.3% in the quarter and 14.9% year to date. Internet sales represented approximately 83% of quarterly sales and 84% of year-to-date sales.
- Gross profit increased 15.1% in the quarter and 19.0% year to date, benefiting from direct manufacturer relationships, minimum advertised price policies, and a shift toward higher-margin prescription medications.
- General and administrative expense increased 8.0% in the quarter and 13.7% year to date, primarily due to higher payroll, bank service fees, and computer-related property expenses.
- Interest income declined materially because of lower interest rates, reducing total other income to $404,000 in the quarter from $763,000 and to $749,000 year to date from $1.6 million.
- Operating cash flow declined year over year despite higher net income, primarily because inventory increased and accounts payable decreased. Inventory was $21.5 million at September 30, 2020, compared with $17.9 million at March 31, 2020.
- No common stock was repurchased during the first six months of fiscal 2021, compared with approximately 613,000 shares repurchased for $11.5 million in the prior-year period. Approximately $28.7 million remained available under the repurchase plan.
Guidance, Outlook, Risks, and Unusual Items
- Management anticipates advertising expense of approximately 8.0% of sales for fiscal 2021, subject to quarterly seasonality and advertising availability.
- Approximately $1.0 million of capital expenditures is forecast for the remainder of fiscal 2021, primarily for the e-commerce platform, funded through operating cash flow.
- Management stated that the company had no material operational disruption from COVID-19 and experienced no major supply-chain disruptions, although some slow- to medium-moving inventory experienced delivery delays. Consumer demand normalized in the quarter after elevated stocking in the June quarter and the reopening of veterinary clinics and brick-and-mortar retailers.
- COVID-19 may adversely affect operations, employee availability, demand, supply chains, financial performance, liquidity, and cash flow. Other risks include increased competition, price sensitivity, seasonality, advertising effectiveness, and potential future actions by state pharmacy boards.
- The effective tax rate declined to 22.6% for the quarter and 21.7% year to date, partly due to a $285,000 one-time state income tax refund and a $106,000 tax benefit related to restricted stock compensation. These items are not necessarily recurring.
- The company adopted no new accounting standard with a material reported effect. ASU 2019-12 is scheduled for adoption on April 1, 2021.
Important Facts for Investors to Verify
- Whether reorder-driven sales growth can continue as COVID-19-related stocking effects fade and veterinary clinics and physical retailers remain open.
- Whether improved gross margins persist, particularly given product mix, supplier pricing policies, and competitive price pressure.
- The sustainability of customer acquisition economics: quarterly acquisition cost increased to $54 from $49, while six-month acquisition cost improved to $50 from $56.
- Inventory levels, supplier lead times, and operating cash conversion, which weakened year over year.
- Future use of cash for dividends, share repurchases, capital expenditures, and operating needs, including the remaining $28.7 million repurchase authorization.
- The effect of lower interest rates on income from the company’s substantial cash balance.
- The filing’s stated legal and regulatory risks, including possible future state pharmacy-board actions and trademark-related litigation.