PetMed Express, Inc. 10-Q Summary
Business Context and Reporting Period
PetMed Express, Inc. is a nationwide direct-to-consumer pet pharmacy operating primarily through the 1-800-PetMeds brand and website. It sells prescription and non-prescription pet medications, health products, and supplies for dogs, cats, and horses. The filing covers the quarter and nine months ended December 31, 2020, within fiscal 2021. Fiscal year-end is March 31. Results are unaudited.
Key Financial Metrics
| Metric | Three Months Ended December 31 | Nine Months Ended December 31 |
|---|---|---|
| Sales | $65.9 million, up 10.0% | $237.5 million, up 13.2% |
| Gross profit | $19.6 million, up 10.9% | $69.4 million, up 16.6% |
| Gross margin | 29.8%, versus 29.5% | 29.2%, versus 28.4% |
| Operating income | $9.3 million, versus $7.9 million | $29.2 million, versus $22.5 million |
| Net income | $7.6 million, versus $6.8 million | $23.8 million, versus $18.8 million |
| Diluted EPS | $0.38, versus $0.34 | $1.18, versus $0.94 |
| Net cash from operating activities | Not separately provided | $21.6 million, versus $21.6 million |
- Operating margin improved to 14.2% in the quarter from 13.2% and to 12.3% for the nine-month period from 10.7%.
- Operating expenses were $10.3 million for the quarter and $40.2 million for the nine-month period. Nine-month operating expenses declined to 16.9% of sales from 17.7%.
- Advertising expense was $3.2 million for the quarter and $17.4 million for the nine-month period. Management expects advertising to be approximately 7.5% to 8.0% of fiscal 2021 sales, subject to seasonality and availability.
- Cash and cash equivalents were $106.5 million at December 31, 2020, compared with $103.8 million at March 31, 2020. Virtually all cash was invested in Level 1 money market funds.
- Working capital was approximately $114.1 million at December 31, 2020, compared with $104.7 million at March 31, 2020.
- Capital expenditures were $1.8 million for the nine months. Approximately $500,000 of additional fiscal 2021 capital expenditures was forecast, primarily for the e-commerce platform.
- The Company had no debt obligations, no material outstanding lease commitments, and no off-balance-sheet arrangements.
- Net cash used in financing activities was $17.0 million, consisting primarily of $17.0 million in dividends paid. No shares were repurchased during the period; approximately $28.7 million remained under the share repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Quarterly sales growth was driven primarily by reorder sales, which increased 11.9% to $60.2 million. New order sales decreased 7.3% to $5.7 million.
- For the nine-month period, reorder sales increased 13.6% to $208.4 million and new order sales increased 10.1% to $29.1 million.
- Internet sales represented 83.4% of quarterly sales and 83.9% of nine-month sales, broadly consistent with the prior year.
- The Company acquired approximately 73,000 new customers in the quarter, compared with 76,000 in the prior-year quarter, and approximately 356,000 in the nine-month period, compared with 313,000 previously.
- Management attributed improved reorder activity partly to the Loyalty Program, launched in September 2019, and the Easy Refill Program.
- Gross margin improved, which management attributed mainly to direct relationships with major manufacturers and manufacturer minimum advertised price policies.
- Interest income declined because of lower interest rates, reducing total other income to $418,000 for the quarter from $722,000 and to $1.2 million for the nine-month period from $2.3 million.
- Inventory increased to $28.2 million from $17.9 million at March 31, 2020, primarily contributing to a $10.3 million use of operating cash.
- No common stock was repurchased in the current nine-month period, compared with approximately 613,000 shares repurchased for $11.5 million in the prior-year period.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management did not provide revenue or earnings guidance. It expects fiscal 2021 advertising expense as a percentage of sales to be approximately 7.5% to 8.0%.
- The Company remained open during the COVID-19 pandemic without material operating disruptions. It reported some delivery delays for inventory items but no major supply-chain disruptions. Management continued work-from-home practices where possible and enhanced workplace disinfection and social distancing.
- Sales may be adversely affected by increased competition and greater consumer price sensitivity. Product demand is seasonal, particularly for heartworm and flea and tick medications.
- Future results may be affected by advertising-market conditions, customer-acquisition costs, product availability, interest rates, and the effectiveness of marketing programs.
- The Company declared a quarterly dividend of $0.28 per share on January 19, 2021, with a February 1 record date and February 12 payment date. The estimated dividend payable was approximately $5.7 million.
- The effective tax rate was 21.6% for the quarter and 21.7% for the nine-month period. The nine-month rate benefited from a $285,000 state income tax refund and a $106,000 tax benefit related to restricted stock compensation. The quarter included a $194,000 one-time tax benefit related to reconciliation of the prior-year tax return.
- Regulatory complaints filed with various state boards have been settled in the past. The Company cautioned that other states could take similar action. It also initiates litigation to protect its trademarks, with no assurance of success.
- The Company will adopt ASU 2019-12, simplifying income-tax accounting, on April 1, 2021. Management does not expect other recently issued accounting standards to have a material effect.
- Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter. No legal proceedings were reported in Part II, Item 1.
Important Facts for Investors to Verify
- Whether reorder-driven growth and the Loyalty and Easy Refill Programs remain sufficient to offset lower quarterly new-customer acquisition.
- Whether gross-margin improvement persists amid competition, price sensitivity, supplier terms, and possible inventory or fulfillment cost pressures.
- Inventory growth, inventory obsolescence reserves, and any effects from delayed deliveries or supply constraints.
- Cash deployment among dividends, the remaining $28.7 million repurchase authorization, capital expenditures, and operating needs.
- The effect of lower interest rates on income from the Company’s substantial cash balance.
- COVID-19 developments, employee availability, supply-chain conditions, and changes in customer demand.
- Potential future state regulatory actions and trademark-related litigation costs or outcomes.
- The filing states that quarterly and nine-month results are not necessarily indicative of the full fiscal year; seasonality and the absence of formal revenue or earnings guidance should be considered.