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. The filing covers the three months ended June 30, 2015, the first quarter of Fiscal 2016. The comparable period is the three months ended June 30, 2014. The company reported 20.3 million common shares outstanding as of July 28, 2015.
Key Financial Metrics
| Metric | Q1 Fiscal 2016 | Q1 Fiscal 2015 | Change |
|---|---|---|---|
| Sales | $71.6 million | $72.5 million | Down 1.3% |
| Gross profit | $23.0 million | $23.8 million | Down 3.4% |
| Gross margin | 32.1% | 32.8% | Down 0.7 percentage points |
| Operating income | $9.1 million | $7.8 million | Up 16.0% |
| Operating margin | 12.7% | 10.8% | Up 1.9 percentage points |
| Net income | $5.8 million | $5.0 million | Up 15.8% |
| Net margin | 8.0% | 6.9% | Up 1.1 percentage points |
| Diluted earnings per share | $0.29 | $0.25 | Up $0.04 |
| Operating cash flow | $10.8 million | $14.3 million | Down $3.4 million |
At June 30, 2015, cash and cash equivalents were $42.7 million, short-term investments were $15.6 million, and total current assets were $91.0 million. Working capital was approximately $75.5 million. The company had no debt obligations and no off-balance-sheet arrangements. Total liabilities were $15.6 million and shareholders’ equity was $77.9 million.
Capital expenditures were $110,000 during the quarter. Dividends paid were $3.6 million. The company stated that approximately $10.2 million remained available under its share repurchase plan, although no issuer share repurchases occurred during the quarter.
Material Changes Versus the Prior Comparable Period
- Sales declined $907,000, primarily because new-order sales fell $2.0 million, partly offset by a $1.1 million increase in reorder sales.
- New customers acquired declined to approximately 148,000 from 184,000, reflecting reduced advertising spending. Internet sales represented approximately 81% of sales, compared with 80% in the prior-year quarter.
- Advertising expense declined $2.0 million, or 20.3%, to $7.9 million. Advertising expense represented 11.0% of sales versus 13.7% previously.
- Gross margin declined because of higher product costs on certain brands.
- Operating income and net income increased despite lower sales and gross profit, primarily because of reduced advertising expense.
- Operating cash flow declined because inventory increased by $2.2 million, compared with an inventory-related source of cash in the prior-year quarter. Increased accounts payable and income taxes payable partially offset this use of cash.
- Accounts payable increased to $10.0 million from $5.2 million at March 31, 2015, and income taxes payable increased to $3.4 million from $50,000.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management anticipated advertising expense of approximately 10.0% of sales for Fiscal 2016, subject to quarterly seasonality and advertising availability.
- Management estimated a Fiscal 2016 effective tax rate of approximately 37.0%.
- Approximately $1.5 million of capital expenditures was forecast for the remainder of Fiscal 2016, expected to be funded from operating cash flow.
- Management cited competition, consumer price sensitivity, advertising-market conditions, and seasonal demand for heartworm, flea, and tick products as factors that could affect results.
- Management noted that future interest income could decline if cash is used for share repurchases, dividends, or operations. Short-term investments are subject primarily to interest-rate and credit risk.
- The company has settled prior complaints filed with state pharmacy boards, but stated that additional states could take similar actions. The company also initiates litigation to protect its trademarks, with no assurance of success.
- Bad debt expense increased by $151,000 because of higher credit-card chargebacks. The allowance for doubtful accounts was $23,000 at June 30, 2015, compared with $8,000 at March 31, 2015.
- On July 20, 2015, the board declared a $0.18 per-share quarterly dividend, estimated at approximately $3.6 million, payable August 14, 2015. On July 24, 2015, it approved approximately 77,500 restricted shares for employees and outside directors.
- The filing states that quarterly results are not necessarily indicative of the full fiscal year. No legal proceedings were reported in Part II of the filing.
Important Facts for Investors to Verify
- Whether lower customer acquisition and new-order sales persist after the reduction in advertising spending.
- Whether higher product costs continue to pressure gross margin.
- Inventory levels, accounts payable, and operating cash flow conversion in subsequent quarters.
- Use of the remaining share repurchase authorization and the company’s ability to sustain quarterly dividends.
- Progress against the approximately $1.5 million Fiscal 2016 capital expenditure forecast.
- Any further state pharmacy-board complaints, trademark litigation, or other contingencies.
- The filing’s stated Fiscal 2016 advertising and effective tax-rate expectations of approximately 10.0% and 37.0%, respectively.