PetMed Express, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2022. The filing is an annual report, not a standalone 2021 fourth-quarter filing; quarterly data for the quarter ended March 31, 2022 is included.
Business context
PetMed Express, doing business as PetMeds, operates a nationwide direct-to-consumer pet pharmacy selling prescription and non-prescription medications, health products, and supplies for dogs, cats, and horses. Approximately 84% of fiscal 2022 sales were generated through the internet. The company had approximately 3,000 stock-keeping units, approximately 2.0 million customers who purchased within the preceding two years, and 212 full-time employees.
The company launched a new AutoShip subscription program in July 2021. AutoShip represented approximately 37% of March sales, and management set a fiscal 2023 goal of approximately 50% of sales through the program.
Key financial metrics
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Net sales | $273.4 million | $309.2 million | Down 11.6% |
| Gross profit | $78.1 million | $89.9 million | Down 13.2% |
| Gross margin | 28.6% | 29.1% | Down 50 basis points |
| Operating income | $25.7 million | $37.6 million | Down 31.6% |
| Net income | $21.1 million | $30.6 million | Down 31.1% |
| Net margin | 7.7% | 9.9% | Down 220 basis points |
| Diluted earnings per share | $1.04 | $1.52 | Down 31.6% |
| Adjusted EBITDA | $34.0 million | $44.6 million | Down 24% |
| Adjusted EBITDA margin | 12.4% | 14.4% | Down approximately 200 basis points |
| Net cash from operating activities | $18.5 million | $40.1 million | Down 53.8% |
| Capital expenditures | $1.8 million | $2.4 million | Down 28.0% |
Revenue and operating trends
- Reorder sales declined 8.2% to $250.4 million; new-order sales declined 37.1% to $23.0 million.
- Internet sales declined 11.2% to $230.3 million, while contact-center sales declined 13.4% to $43.2 million.
- New customer additions fell to approximately 263,000 from approximately 443,000. Average purchase value increased to approximately $93 from $89.
- Cost of sales declined 10.9% in dollars but increased to 71.4% of sales from 70.9%. Management attributed the margin pressure partly to manufacturers shifting rebate funding from product-cost discounts to cooperative marketing rebates.
- General and administrative expense increased 9.0% to $30.8 million, primarily due to higher payroll and stock compensation expense, professional fees, and other property, travel, and insurance costs.
- Advertising expense declined to $18.8 million from $21.6 million after increased cooperative marketing reimbursements. However, customer acquisition cost increased to $72 from $49 because of higher advertising prices and less efficient variable marketing spending.
Liquidity, capital resources, and balance sheet
- Cash and cash equivalents were $111.1 million at March 31, 2022, compared with $118.7 million a year earlier.
- Working capital was approximately $117.8 million, compared with $116.3 million at March 31, 2021.
- The company had no debt obligations and no material outstanding lease commitments.
- Total liabilities were $34.1 million and shareholders’ equity was $142.2 million at March 31, 2022.
- Cash used in financing activities was $24.4 million, principally reflecting $24.4 million of dividends paid. The company did not repurchase shares during fiscal 2022 or fiscal 2021.
- Approximately $28.7 million remained available under the share repurchase authorization at March 31, 2022.
- Management forecast approximately $5.0 million of fiscal 2023 capital expenditures, expected to be funded with operating cash flow, and stated that it had no current need or plans to obtain additional capital.
Material changes, outlook, and unusual items
- Fiscal 2022 results reflected a more competitive market, higher advertising costs, increased veterinary visits following pandemic-related disruptions, and reduced customer acquisition.
- COVID-19 did not materially disrupt fiscal 2022 operations, although the company experienced some inventory delivery delays and continues to identify supply-chain, employee availability, fulfillment, and shipping risks.
- Management projected fiscal 2023 general and administrative expense at approximately 12.5% of sales, stock compensation expense of approximately $6.4 million, advertising expense of approximately 7.0% of sales, and an effective tax rate of approximately 23.0%.
- On July 31, 2021, the former CEO’s employment ended. The company paid two $325,000 severance installments under a separation agreement and appointed Mathew Hulett as CEO and president effective August 30, 2021.
- The new CEO received 90,000 restricted shares and 510,000 performance-based restricted shares. None of the performance shares had vested by March 31, 2022.
- Share-based compensation expense increased to $4.5 million from $3.3 million, with $13.4 million of unrecognized compensation cost remaining at year-end.
- On April 19, 2022, the company entered into a three-year partnership with Vetster Inc., invested $5.0 million for a 5% minority interest, and received performance-based warrants. PetMed Express became Vetster’s exclusive e-commerce provider, while Vetster became the exclusive provider of telehealth and telemedicine services to PetMed Express.
- The board declared a $0.30-per-share quarterly dividend payable May 27, 2022. Future dividends remain discretionary.
Principal risks and contingencies
- Loss, suspension, or non-renewal of pharmacy licenses, particularly in Florida or other concentrated markets, could impair prescription sales.
- Approximately 80% of products were purchased from five suppliers, creating supplier concentration and potential exposure to supply interruptions, rebate changes, and minimum advertised pricing policies.
- Competition from veterinarians, online retailers, and traditional retailers may pressure sales, pricing, customer acquisition costs, and margins.
- The business depends substantially on a single South Florida headquarters and distribution center, increasing exposure to hurricanes, facility damage, power outages, and other business interruptions.
- Cybersecurity incidents, payment-processing failures, website outages, shipping disruptions, and inventory shortages could adversely affect customer service and financial results.
- Sales are seasonal, particularly for flea, tick, and heartworm products; fiscal 2022 quarterly sales represented approximately 29%, 25%, 22%, and 24% of annual sales, respectively.
- The company reported routine litigation and historical pharmacy-board complaints but stated that it did not expect existing matters to have a material adverse effect. No reserves related to federal or state regulatory matters were recorded at March 31, 2022.
Investor verification checklist
- Verify whether the decline in new customers and elevated customer acquisition cost is stabilizing, and whether AutoShip adoption improves retention and reorder trends.
- Track gross margin and manufacturer rebate structures, including the effect of cooperative marketing rebates versus product-cost discounts.
- Assess fiscal 2023 sales, advertising, general and administrative, stock compensation, tax-rate, and capital-expenditure expectations against actual results.
- Review the Vetster investment, partnership economics, warrants, and any effects on future revenue, expenses, or liquidity.
- Monitor pharmacy licensing, prescription authorization practices, supplier concentration, minimum advertised pricing compliance, and inventory availability.
- Confirm continued cash generation and the allocation of cash among dividends, share repurchases, capital expenditures, and strategic investments.
- Note that management and RSM US LLP reported effective internal control over financial reporting, and the independent auditor issued unqualified opinions on the financial statements and internal controls.