PetMed Express, Inc. — Form 10-Q Summary
Business Context and Reporting Period
PetMed Express, Inc., doing business as 1-800-PetMeds, markets prescription and non-prescription pet medications, health products, and supplies directly to consumers, primarily in the United States. The filing covers the three months ended June 30, 2019, the first quarter of fiscal 2020; comparative figures are for the three months ended June 30, 2018.
Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Sales | $80.0 million | $87.4 million | Down 8.5% |
| Gross profit | $21.9 million | $30.0 million | Down 27% |
| Gross margin | 27.3% | 34.3% | Down 700 basis points |
| Income from operations | $6.2 million | $15.8 million | Down 60.9% |
| Net income | $5.3 million | $12.6 million | Down 57.5% |
| Diluted EPS | $0.26 | $0.62 | Down $0.36 |
| Net cash provided by operations | $36 thousand | $22.0 million | Material decrease |
- Cost of sales increased 1.2% to $58.1 million, representing 72.7% of sales versus 65.7% in the prior-year quarter.
- Advertising expense increased 29% to $8.6 million, or 10.8% of sales, primarily because television advertising was reintroduced.
- General and administrative expense decreased 6.1% to $6.5 million.
- Other income increased to $824 thousand, including $567 thousand of interest income.
- The effective income tax rate was approximately 23.5% in both periods.
- Cash and cash equivalents totaled $83.4 million at June 30, 2019, compared with $100.5 million at March 31, 2019.
- Working capital was approximately $97.0 million at June 30, 2019, versus $107.8 million at March 31, 2019.
- The company reported no debt obligations and no off-balance-sheet arrangements.
- Inventory increased to $30.2 million from $21.4 million at March 31, 2019.
Material Changes Versus the Prior Comparable Period
- Sales declined $7.4 million, driven by lower reorder sales of 5.3% and lower new-order sales of 22.9%.
- New customers acquired fell to approximately 140,000 from 169,000. Average purchase size declined to approximately $86 from $90.
- Internet sales decreased 9.8% to $67.0 million, while contact-center sales declined 0.8% to $13.0 million. Internet sales represented 83.8% of total sales versus 85.0%.
- Management attributed margin compression to price reductions in response to online competition and higher product costs.
- Operating expenses increased as a percentage of sales to 19.6% from 16.3%, primarily due to higher advertising.
- The company repurchased and retired approximately 613,000 shares for $11.5 million and paid $5.5 million in dividends. Approximately $28.7 million remained under the repurchase authorization at June 30, 2019.
- Operating cash flow was substantially reduced by lower earnings, an $8.8 million inventory build, and unfavorable working-capital changes.
Guidance, Outlook, Risks, and Unusual Items
- Management anticipated advertising expense of approximately 9.0% of sales and an effective tax rate of approximately 24.0% for fiscal 2020; both may vary by quarter.
- The company forecast approximately $4.8 million of capital expenditures for the remainder of fiscal 2020, primarily for its e-commerce platform, funded from operating cash.
- Management cited increased competition, price sensitivity, advertising-market conditions, and seasonality—particularly for heartworm, flea, and tick products—as key business risks.
- Management stated that direct purchasing relationships with major manufacturers may help reduce inventory costs and improve future gross margins.
- The company adopted the new lease standard on April 1, 2019, recognizing approximately $275 thousand of operating lease assets and liabilities; management said the overall financial statement impact was not material.
- Two putative class actions allege that the company’s website violates the Americans with Disabilities Act and related New York laws. The company denies wrongdoing, intends to defend the matters, and cannot currently estimate the likelihood or amount of any loss.
- On July 22, 2019, the board declared a $0.27-per-share dividend, estimated at approximately $5.4 million, payable August 9, 2019.
- On July 26, 2019, the board approved restricted-share awards totaling 114,625 shares to the CEO, employees, and independent directors.
- Disclosure controls and procedures were deemed effective, and no material changes to internal control over financial reporting were reported.
Important Facts for Investors to Verify
- Whether sales and new-customer acquisition recover amid heightened online competition and price reductions.
- Whether gross margin stabilizes after the 700-basis-point year-over-year decline.
- Inventory levels, inventory reserves, and the effect of the inventory build on future operating cash flow.
- Cash deployment among share repurchases, dividends, capital expenditures, and operating needs.
- Progress and realized savings from direct manufacturer purchasing relationships.
- The status and potential financial exposure of the two website accessibility lawsuits and any future pharmacy-board matters.
- Whether the stated fiscal 2020 advertising, tax-rate, and capital-expenditure expectations remain achievable.