PetMed Express, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2014. The filing is an annual report, not a quarterly filing; the fiscal fourth quarter ended March 31, 2014 is included. The company operates 1-800-PetMeds, a nationwide direct-to-consumer pet pharmacy selling prescription and non-prescription medications, health products, and supplies for dogs and cats.
Business Context
- Approximately 3,000 products are marketed through Internet, telephone contact center, and direct-mail channels.
- Internet sales represented 79.0% of fiscal 2014 sales, up from 77.2% in fiscal 2013.
- Approximately 27 million website visitors generated about 10% order conversion; approximately 79% of orders shipped within 24 hours.
- Prescription medications represented 44% of sales, compared with 40% in fiscal 2013; non-prescription medications and supplies represented 55%, compared with 59%.
- The company acquired approximately 597,000 new customers, down from 630,000 in fiscal 2013, while average order size increased to approximately $75 from $73.
Financial Performance and Position
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Sales | $233.4 million | $227.8 million | Up 2.4% |
| Gross profit | $77.6 million | $77.1 million | Up $0.5 million |
| Gross margin | 33.3% | 33.9% | Down 0.6 percentage points |
| Operating income | $28.2 million | $27.0 million | Up 4.5% |
| Operating margin | 12.1% | 11.9% | Up 0.2 percentage points |
| Net income | $18.0 million | $17.2 million | Up 4.7% |
| Diluted EPS | $0.90 | $0.86 | Up $0.04 |
| Cash flow from operations | $13.5 million | $13.3 million | Up $0.2 million |
- Fiscal 2014 fourth-quarter sales were $48.6 million, gross profit was $17.5 million, operating income was $7.1 million, and net income was $4.5 million; diluted EPS was $0.23.
- At March 31, 2014, cash and cash equivalents were $18.3 million and short-term investments were $15.5 million, for approximately $33.8 million of cash and investments.
- Working capital was $66.1 million, compared with $59.8 million at March 31, 2013. Total liabilities were $8.2 million and the company reported no debt obligations.
- Inventories increased to $35.7 million from $31.6 million, while total assets increased to $78.4 million from $73.2 million.
- Capital expenditures were $45,000 in fiscal 2014. Management forecast approximately $2.8 million of fiscal 2015 capital expenditures to be funded from operating cash flow.
- The company paid $13.3 million of dividends in fiscal 2014 and declared $0.66 per common share in dividends. No shares were repurchased during fiscal 2014; approximately $10.2 million remained available under the repurchase plan.
Material Changes Versus Fiscal 2013
- Sales growth was driven by a 3.5% increase in reorder sales, partially offset by a 1.9% decline in new-order sales.
- Internet sales increased 4.8%, while contact-center sales declined 5.4%.
- Cost of sales increased faster than revenue, primarily because of higher product costs and promotional discounts, reducing gross margin from 33.9% to 33.3%.
- General and administrative expense declined 1.1%, advertising expense declined approximately $0.3 million, and depreciation declined approximately $0.2 million.
- Advertising expense fell to 11.6% of sales from 12.0%; customer acquisition cost increased to $46 from $44 because of fewer new customers.
- Net income benefited from higher sales and lower operating expenses. The effective tax rate declined to 36.7% from 37.1%, partly because of a one-time benefit related to a prior-year tax over-accrual.
- Operating cash flow was broadly stable, while investing cash use declined substantially because fiscal 2014 included no comparable purchases of short-term investments.
Guidance, Outlook, Risks and Unusual Items
- Management expected fiscal 2015 advertising expense to be approximately 12% of sales and the effective tax rate to be approximately 37%; no revenue or earnings guidance was provided.
- Sales are seasonal, particularly for heartworm and flea-and-tick products. Fiscal 2014 quarterly sales were approximately 32%, 26%, 21%, and 21% of the annual total; colder-than-normal weather negatively affected the March quarter.
- Key risks include competition from veterinarians and online and traditional retailers, price pressure, customer acquisition costs, product and supplier availability, inventory management, and reliance on secondary distributors. Five suppliers accounted for approximately 50% of purchases.
- Prescription sales depend on maintaining pharmacy licenses in Florida and other states and on veterinarians authorizing prescriptions. The company has settled prior state pharmacy-board complaints and remains subject to potential future administrative actions.
- Approximately 50% of sales came from customers in eight states, increasing geographic concentration of regulatory and operating risk.
- The company operates its headquarters, pharmacy, fulfillment, and distribution activities from one South Florida location, creating exposure to hurricanes, facility damage, power outages, system failures, and shipping disruptions.
- Flea-and-tick product restrictions or safety actions by the EPA could reduce future sales and profits. Cybersecurity, privacy, website, intellectual-property, and regulatory compliance issues could also materially affect results.
- Subsequent to year-end, the company extended its facility lease to December 1, 2016 and paid a $0.17-per-share quarterly dividend, totaling approximately $3.4 million, on May 23, 2014.
- Contractual obligations totaled approximately $3.3 million, consisting primarily of property lease commitments and an executive employment contract. No off-balance-sheet arrangements were reported.
- McGladrey LLP issued unqualified opinions on the financial statements and internal control over financial reporting; management reported effective disclosure controls and internal controls.
Investor Verification Items
- Verify the sustainability of sales growth given the decline in new customers and the company’s reliance on reorder sales.
- Monitor gross margin for further effects from product costs, promotions, generic product mix, and supplier pricing.
- Assess pharmacy licensing, prescription authorization practices, and the status of any state pharmacy-board complaints.
- Review supplier concentration, secondary-distributor dependence, inventory growth, and product availability.
- Evaluate the company’s ability to fund dividends, planned capital expenditures, and any remaining share repurchases from operating cash flow.
- Track seasonal and weather-related volatility, EPA actions affecting flea-and-tick products, competitive pricing, and customer acquisition costs.
- Confirm the terms and accounting treatment of the lease extension and the continuing discretionary nature of future dividends.