PetMed Express, Inc. Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2016. The filing also presents unaudited fourth-quarter data for the quarter ended March 31, 2016; the request metadata references “2015 Q4,” but the filing is the fiscal 2016 annual report.
Business Context
PetMed Express, doing business as 1-800-PetMeds, is a nationwide direct-to-consumer pet pharmacy selling prescription and non-prescription medications, health products, and supplies for dogs and cats. Products are marketed through television, online, direct-mail, telephone, and e-commerce channels.
- Approximately 3,000 SKUs; approximately 81% of fiscal 2016 sales were generated through the Internet.
- Approximately 33 million website visitors and an estimated 8% website order conversion rate.
- Approximately 489,000 new customers were acquired in fiscal 2016 versus 529,000 in fiscal 2015.
- Reorder sales represented 83.3% of fiscal 2016 sales, compared with 82.7% in fiscal 2015.
- Four suppliers accounted for approximately 50% of product purchases.
Financial Overview
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Sales | $234.7 million | $229.4 million | Up 2.3% |
| Gross profit | $76.3 million | $76.3 million | Approximately flat |
| Gross margin | 32.5% | 33.2% | Down 70 basis points |
| Operating income | $32.4 million | $27.6 million | Up 17.3% |
| Net income | $20.6 million | $17.5 million | Up 17.8% |
| Net margin | 8.8% | 7.6% | Up 120 basis points |
| Diluted EPS | $1.02 | $0.87 | Up 17.2% |
| Operating cash flow | $21.1 million | $32.0 million | Down $11.0 million |
| Cash and equivalents | $37.6 million | $35.6 million | Up $2.0 million |
| Total liabilities | $7.1 million | $7.4 million | Down $0.3 million |
| Debt | None | None | No change |
Cost of sales increased 3.4% to $158.4 million, or 67.5% of sales, primarily because of higher product costs and additional customer discounts. Operating expenses declined to $43.9 million from $48.7 million, mainly because advertising expense decreased $3.3 million to $21.8 million. The effective tax rate was 36.8%, compared with 37.2%.
Liquidity, Capital Allocation, and Balance Sheet
- Working capital was $60.5 million at March 31, 2016, down from $72.2 million, primarily because of the $18.5 million purchase of real property.
- Cash flow from investing activities was a use of $4.5 million, including $20.1 million of property and equipment purchases and proceeds from the sale of $15.6 million of short-term investments.
- Cash flow from financing activities was a use of $14.5 million, principally dividends paid of $14.7 million.
- The Company had no outstanding debt and no off-balance-sheet arrangements.
- The Company purchased a 14.6-acre, approximately 185,000-square-foot property in Delray Beach, Florida, for $18.5 million plus closing costs. It expected to renovate and occupy approximately 97,000 square feet in the third quarter of fiscal 2017.
- Management forecast approximately $9.0 million of fiscal 2017 capital expenditures, primarily for property improvements, distribution-center infrastructure, and computer equipment, funded from operating cash flow.
- The quarterly common dividend increased from $0.18 to $0.19 per share after year-end. Future dividends remain discretionary.
- Approximately $10.2 million remained under the share repurchase authorization; no shares were repurchased in fiscal 2016 or fiscal 2015.
Fourth-Quarter Fiscal 2016 Data
| Metric | Quarter ended March 31, 2016 | Quarter ended March 31, 2015 |
|---|---|---|
| Sales | $55.4 million | $50.0 million |
| Gross profit | $17.7 million | $16.9 million |
| Operating income | $8.6 million | $7.8 million |
| Net income | $5.4 million | $5.0 million |
| Diluted EPS | $0.27 | $0.25 |
Material Changes Versus the Prior Comparable Period
- Sales growth was driven by a 3.1% increase in reorder sales, while new-order sales declined 1.5%.
- Average purchase increased to approximately $81 from $77.
- Internet sales increased 3.6% to $190.8 million and rose to 81.3% of sales from 80.2%; contact-center sales declined 3.1%.
- Gross margin contracted because of higher costs for certain brands and greater discounts.
- Lower television advertising spending reduced advertising expense by approximately 13%, and customer acquisition cost improved to $45 from $48.
- Fiscal 2015 included a $1.7 million one-time charge for a discontinued information-technology project, with a $1.1 million after-tax impact. No related charge occurred in fiscal 2016.
- New customer acquisition continued to decline, from 529,000 to 489,000, despite higher total sales.
Guidance, Outlook, Risks, and Unusual Items
- Management anticipated fiscal 2017 advertising expense at approximately 9% of sales and an effective tax rate of approximately 37%; no revenue or earnings guidance was provided.
- Sales are seasonal, particularly for heartworm, flea, and tick products. Fiscal 2016 quarterly sales distribution was approximately 30%, 24%, 22%, and 24%.
- Key risks include prescription-pharmacy licensing and regulatory compliance, state pharmacy-board actions, prescription authorization resistance from veterinarians, supplier concentration and reliance on secondary distributors, inventory management, price competition, advertising effectiveness, and website or information-system failures.
- Approximately 50% of sales came from eight states, creating geographic and licensing concentration risk.
- Operations and fulfillment were concentrated in a single South Florida location, exposing the Company to hurricane, facility, power, transportation, and business-interruption risks.
- The Company settled prior pharmacy-board complaints and stated that routine litigation and administrative complaints were not expected to have a material adverse effect, but it could not assure that additional regulatory actions would not occur.
- The CEO’s amended employment agreement provides for a three-year term beginning March 16, 2016, annual salary of $600,000, and a grant of 120,000 restricted shares.
- RSM US LLP issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Investor Verification Checklist
- Verify whether fiscal 2017 revenue and earnings growth can offset declining new-customer additions.
- Monitor gross margin for further effects from supplier pricing, discounts, and product mix.
- Assess the return on the Delray Beach property investment and the timing and cost of the planned relocation and renovations.
- Review operating cash flow after capital expenditures and dividends, given the decline from fiscal 2015.
- Track pharmacy licensing, prescription-authorization complaints, and any regulatory or legal developments.
- Evaluate supplier concentration and the Company’s progress toward direct manufacturer relationships.
- Confirm the sustainability of the quarterly dividend and any future share repurchases relative to cash generation.