PetMed Express, Inc. — Form 10-Q Summary
Business Context and Reporting Period
PetMed Express, Inc., doing business as 1-800-PetMeds, is a nationwide direct-to-consumer pet pharmacy selling prescription and non-prescription medications, health products, and supplies primarily through its website and contact center. The filing covers the quarter and nine months ended December 31, 2019, within fiscal 2020. The financial statements are unaudited.
Financial Performance and Key Metrics
| Metric | Three Months Ended December 31, 2019 | Three Months Ended December 31, 2018 | Nine Months Ended December 31, 2019 | Nine Months Ended December 31, 2018 |
|---|---|---|---|---|
| Sales | $59.9 million | $60.1 million | $209.8 million | $218.9 million |
| Gross profit | $17.7 million | $19.4 million | $59.6 million | $74.6 million |
| Gross margin | 29.5% | 32.3% | 28.4% | 34.1% |
| Income from operations | $7.9 million | $9.4 million | $22.5 million | $38.4 million |
| Net income | $6.8 million | $7.8 million | $18.8 million | $31.1 million |
| Diluted earnings per share | $0.34 | $0.38 | $0.94 | $1.52 |
Net margin was approximately 11.4% for the quarter and 9.0% for the nine-month period, compared with 13.0% and 14.2%, respectively, in the prior-year periods. Operating expenses were $9.8 million for the quarter and $37.1 million for the nine months. Advertising expense was $3.2 million for the quarter and $16.5 million for the nine months.
Cash provided by operating activities was $21.6 million for the nine months, compared with $32.0 million in the prior-year period. Capital expenditures were $1.8 million, compared with $0.5 million. Financing cash outflows were $27.9 million, including $11.5 million for repurchases of approximately 613,000 common shares and $16.4 million of dividends.
Cash and cash equivalents were $92.4 million at December 31, 2019, compared with $100.5 million at March 31, 2019. Working capital was $102.0 million, compared with $107.8 million at March 31, 2019. The company had no debt obligations and no off-balance-sheet arrangements. All cash and cash equivalents were invested in money market funds.
Material Changes Versus the Prior Comparable Period
- Quarterly sales decreased slightly by $153,000, or 0.3%; nine-month sales declined $9.0 million, or 4.1%.
- New-order sales decreased 9.9% for the quarter and 19.9% for the nine months. New customers acquired declined to approximately 76,000 from 81,000 for the quarter and to approximately 313,000 from 366,000 for the nine-month period.
- Reorder sales increased 1.0% for the quarter but decreased 1.3% for the nine months.
- Internet sales decreased 1.4% for the quarter and 5.3% for the nine months, while contact-center sales increased 5.9% and 2.5%, respectively.
- Cost of sales increased to 70.5% of quarterly sales and 71.6% of nine-month sales, compared with 67.7% and 65.9%. Management attributed the deterioration to customer price reductions intended to stimulate demand and higher product costs.
- General and administrative expense increased 4.3% in the quarter, primarily due to higher payroll costs in customer care, pharmacy, and information technology; it was approximately flat for the nine months.
- Quarterly advertising expense decreased 12.6%, but nine-month advertising expense increased 5.9%. Customer acquisition cost was $42 for the quarter and $53 for the nine months, compared with $45 and $43, respectively.
- Sequential gross margin improved from 27.3% in June 2019 to 28.6% in September 2019 and 29.5% in December 2019, although it remained below the prior-year level.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management currently anticipates advertising expense of approximately 8.0% of sales for fiscal 2020, subject to seasonality and advertising availability.
- The company expects approximately $3.3 million of capital expenditures during the remainder of fiscal 2020, primarily for its e-commerce platform, funded from operating cash flow.
- Management identified increased online competition, customer price sensitivity, product-cost inflation, advertising effectiveness, and seasonal demand for heartworm and flea-and-tick products as key risks. The filing provides no formal revenue or earnings guidance.
- Management noted that direct relationships with all major manufacturers and manufacturer minimum-advertised-price policies may support greater pricing discipline.
- The company adopted the new lease standard on April 1, 2019. At December 31, 2019, the related operating lease asset and current liability were approximately $165,000, with no material financial statement impact.
- The quarterly effective tax rate was 21.0%, helped by a Florida tax-rate reduction and a one-time $96,000 tax benefit. The nine-month rate was 23.9%, including a $322,000 tax charge related to restricted stock compensation.
- A putative website-accessibility class action was subject to a confidential settlement requiring website modifications within 24 months and a $10,000 payment, pending execution of the proposed consent decree. The company denies wrongdoing.
- The board declared a quarterly dividend of $0.27 per share on January 21, 2020, estimated at approximately $5.4 million, payable February 14, 2020.
Important Facts for Investors to Verify
- Whether the decline in new-customer acquisition and nine-month sales continues into fiscal 2021.
- Whether gross-margin improvement continues and offsets ongoing price competition and product-cost pressure.
- The effectiveness and return on the approximately 8.0% of sales advertising plan.
- Use of the $28.7 million remaining share-repurchase authorization alongside recurring quarterly dividends.
- Cash generation after dividends, repurchases, and planned $3.3 million capital expenditures.
- Progress and final resolution of the website-accessibility settlement and any additional state regulatory matters.
- The impact of interest-rate changes on income from the company’s substantial money-market investments.