PetMed Express, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2011, the second quarter of fiscal 2012. Fiscal year-end is March 31. The financial statements are unaudited.
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 primarily for dogs and cats. Products are marketed through television, online, and direct-mail advertising. Approximately 74.4% of quarterly sales and 73.9% of six-month sales were generated through the Internet.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Six Months Ended September 30 |
|---|---|---|
| Sales | $58.2 million; down 4.9% | $131.8 million; down 2.8% |
| Gross profit | $19.9 million; down 10.7% | $44.0 million; down 11.1% |
| Gross margin | 34.2%, versus 36.5% | 33.4%, versus 36.5% |
| Income from operations | $6.1 million; down 21.3% | $13.6 million; down 30.2% |
| Net income | $3.9 million; down 21.0% | $8.8 million; down 28.2% |
| Diluted earnings per share | $0.19, versus $0.22 | $0.41, versus $0.54 |
| Net margin | 6.7%, versus 8.1% | 6.7%, versus 9.0% |
Cost of sales was $38.3 million for the quarter and $87.8 million for the six months. Operating expenses were $13.9 million and $30.4 million, respectively. Quarterly advertising expense declined 7.8% to $7.9 million, while six-month advertising expense increased 3.4% to $18.0 million. The company estimates advertising will be approximately 13% of fiscal 2012 sales, subject to seasonal fluctuations. The estimated fiscal 2012 effective tax rate is approximately 37.0%.
Six-month net cash provided by operating activities was $16.2 million, compared with $26.7 million in the prior-year period. Investing activities provided $9.4 million, primarily reflecting investment liquidations, compared with $10.4 million used in the prior-year period. Financing activities used $28.1 million, including $22.6 million of share repurchases and $5.4 million of dividends. Cash and cash equivalents were $47.1 million at September 30, 2011, compared with $49.7 million at March 31, 2011.
At September 30, 2011, working capital was $72.8 million, compared with $80.6 million at March 31, 2011. The company had no debt obligations. Total investments were $13.0 million, including $10.3 million of short-term investments and $2.7 million of long-term auction rate securities. Total liabilities were $9.0 million against total assets of $88.0 million.
Material Changes Versus the Prior Comparable Period
- Sales declined because of lower reorder and new-order sales, smaller average orders, increased competition, aggressive pricing, and the introduction of generic Frontline products.
- The average quarterly purchase declined to approximately $76 from $79; the six-month average declined to approximately $78 from $81.
- Gross margin declined 230 basis points for both the quarter and six-month period, primarily due to more aggressive pricing and higher product costs.
- Contact center sales declined 14.3% for the quarter and 12.8% for the six-month period, while six-month Internet sales increased 1.3%.
- New customer acquisition remained broadly stable at approximately 184,000 for the quarter and increased to approximately 410,000 for the six-month period. Six-month customer acquisition cost increased to approximately $44 from $43.
- Share repurchases increased substantially to approximately $22.6 million for the six months, compared with $4.2 million in the prior-year period. Approximately 2.0 million shares were repurchased, and approximately $15.1 million remained available under the repurchase authorization at September 30, 2011.
- The weighted average diluted share count declined to 20.7 million for the quarter and 21.2 million for the six months, compared with 22.7 million and 22.8 million, respectively.
- The six-month effective tax rate declined to 36.8% from 38.2%, partly because the prior-year period included a one-time tax adjustment.
Guidance, Outlook, Risks, and Unusual Items
- Management expects advertising expense to be approximately 13% of fiscal 2012 sales and the effective tax rate to be approximately 37.0%.
- Management expects approximately $300,000 of capital expenditures during the remainder of fiscal 2012, funded through operating cash flow.
- Management identified continuing risks from competition, consumer price sensitivity, generic products, reduced order sizes, response rates to advertising, and seasonal demand for heartworm and flea-and-tick products.
- The company held $2.7 million of auction rate securities classified as long-term investments. Auctions have failed because of illiquidity, and the securities are valued using Level 3 discounted cash-flow inputs. The company recorded a cumulative temporary impairment of $36,000 and believes it can ultimately recover the investment cost, but the timing and liquidity remain uncertain.
- The company is defending a patent-infringement lawsuit involving electronic catalog systems. Vendor indemnification ended on February 15, 2011, and management stated that the potential outcome and loss cannot currently be estimated.
- The company has previously settled complaints with state pharmacy boards and may face similar actions in the future.
- In October 2011, the company repurchased approximately 118,000 shares for approximately $1.0 million. On October 31, 2011, the board declared a quarterly dividend of $0.125 per share, estimated at approximately $2.5 million.
- No off-balance-sheet arrangements were reported. Management concluded that disclosure controls and procedures were effective, with no significant changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether declining sales and gross margins persist as pricing competition and generic alternatives increase.
- The sustainability and cash-flow impact of the share repurchase program and quarterly dividends.
- The liquidity, valuation assumptions, and potential impairment exposure related to the remaining auction rate securities.
- The status and potential financial consequences of the patent litigation and pharmacy-board matters.
- Whether advertising spending and customer acquisition costs generate sufficient incremental sales and repeat purchases.
- The effect of seasonality, product mix, and the company’s decision regarding generic flea-and-tick products on future results.