PetMed Express, Inc. Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2018. The source also provides unaudited fourth-quarter results for the quarter ended March 31, 2018; the request metadata identifies “2017 Q4,” but the filing is the fiscal 2018 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 primarily for dogs and cats. Products are sold through the Internet, telephone contact center, and direct mail/print channels.
- Approximately 3,000 SKUs were offered.
- Internet sales represented 84.1% of fiscal 2018 sales, compared with 82.5% in fiscal 2017.
- The Company attracted approximately 521,000 new customers in fiscal 2018 versus 514,000 in fiscal 2017.
- Approximately 83.1% of sales were reorder sales.
- The average purchase increased to approximately $87 from $83.
Financial Performance and Liquidity
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Sales | $273.8 million | $249.2 million | +9.9% |
| Gross profit | $97.8 million | $79.3 million | +23.3% |
| Gross margin | 35.7% | 31.8% | +3.9 percentage points |
| Operating income | $52.1 million | $37.5 million | +39.1% |
| Operating margin | 19.0% | 15.0% | +4.0 percentage points |
| Net income | $37.3 million | $23.8 million | +56.5% |
| Diluted EPS | $1.82 | $1.17 | +55.6% |
| Net cash from operating activities | $37.4 million | $47.2 million | Decrease of $9.8 million |
| Cash and cash equivalents | $77.9 million | $58.7 million | +32.7% |
| Working capital | $87.1 million | $63.4 million | +37.4% |
Fiscal 2018 cost of sales increased 3.6% to $176.0 million, but declined to 64.3% of sales from 68.2%. Management attributed the margin improvement primarily to a shift toward higher-margin products, partly offset by increased customer discounts.
Operating expenses increased to $45.7 million from $41.8 million. General and administrative expense rose 6.5%, advertising expense increased to $19.3 million, and depreciation increased to $2.1 million following investment in the new headquarters and distribution facility. Advertising expense was 7.0% of sales, and customer acquisition cost increased to approximately $37 from $34.
The effective tax rate declined to 30.7% from 37.2%, primarily reflecting the Tax Cuts and Jobs Act, including a blended federal rate, a stock-compensation windfall benefit, deferred tax remeasurement, and a return-to-provision adjustment. Management estimated a fiscal 2019 effective tax rate of approximately 24.0%.
Net cash used in investing activities was $0.7 million, primarily capital expenditures. Net cash used in financing activities was $17.5 million, primarily dividends. Fiscal 2019 capital expenditures were forecast at approximately $1.0 million and were expected to be funded from operating cash flow.
The Company had no debt obligations, no outstanding lease commitments, and no off-balance-sheet arrangements at March 31, 2018. Total liabilities were $19.1 million and shareholders’ equity was $115.7 million.
Material Changes Versus the Prior Comparable Period
- Sales growth accelerated, supported by both new-order and reorder sales; reorder sales increased 10.3%.
- Gross margin expanded materially from 31.8% to 35.7%, primarily due to product mix.
- Net income increased 57%, aided by operating leverage and lower taxes.
- Operating cash flow declined despite higher net income, mainly because inventory increased by $3.1 million in fiscal 2018, while fiscal 2017 benefited from a large increase in accounts payable and a decline in inventory.
- Cash increased by $19.2 million during fiscal 2018 after funding $17.5 million of financing outflows, including dividends.
- The quarterly dividend increased from $0.20 to $0.25 per share beginning with the dividend declared in January 2018. Fiscal 2018 dividends declared totaled $0.85 per share.
- No shares were repurchased in fiscal 2018; approximately $10.2 million remained available under the repurchase plan.
- A consolidated securities class action lawsuit was voluntarily dismissed without prejudice in January 2018.
Fourth-Quarter Results
| Quarter ended March 31 | 2018 | 2017 |
|---|---|---|
| Sales | $67.3 million | $63.0 million |
| Gross profit | $24.9 million | $22.2 million |
| Operating income | $14.0 million | $11.7 million |
| Net income | $10.2 million | $7.5 million |
| Diluted EPS | $0.50 | $0.37 |
Guidance, Outlook, Risks, and Unusual Items
- Management expected advertising expense to remain approximately 7% to 8% of sales in fiscal 2019, subject to seasonality and advertising availability.
- Management estimated a fiscal 2019 effective tax rate of approximately 24.0%.
- Management expected ASC 606 revenue adoption on April 1, 2018, using the modified retrospective method, to have no material revenue impact because revenue would continue to be recognized upon shipment.
- Sales are seasonal, particularly for flea, tick, and heartworm products. Fiscal 2018 quarterly sales represented approximately 29%, 24%, 22%, and 25% of annual sales, respectively.
- The Company relies partly on secondary distributors because certain major manufacturers do not sell directly to it. Supply shortages or higher acquisition costs could reduce sales and margins. Four suppliers represented approximately 50% of product purchases.
- The Company faces competition from veterinarians, online retailers, and traditional retailers, with potential pressure from pricing, promotions, and customer acquisition costs.
- Pharmacy operations depend on maintaining Florida, other state, federal, and controlled-substance licenses. Regulatory actions or license loss could materially impair prescription sales.
- Approximately 50% of sales came from customers in eight states, increasing exposure to licensing or market disruptions in those states.
- Operations, fulfillment, and the principal distribution center are concentrated in one South Florida location, creating hurricane, facility, power, transportation, and business interruption risk.
- Cybersecurity, payment processing, website, mobile application, and information-system failures could disrupt sales and create litigation, regulatory, or reputational exposure.
- The Company settled prior state pharmacy-board complaints and stated that similar actions could occur in the future. Routine litigation was not expected to have a material financial effect.
- The fiscal 2018 tax rate benefited from several items associated with the 2017 Tax Cuts and Jobs Act; these benefits may not recur at the same level.
Important Facts to Verify
- Whether the fiscal 2018 gross-margin expansion is sustainable or primarily reflects temporary product-mix and promotional factors.
- Inventory levels, supplier concentration, product availability, and the effect of secondary sourcing on future gross margins.
- Trends in reorder rates, customer acquisition costs, Internet conversion, and advertising spending.
- The sustainability of quarterly dividends and any future use of the remaining $10.2 million share-repurchase authorization.
- Compliance with pharmacy licensing, prescription authorization, controlled-substance, and other state and federal requirements.
- The effect of seasonality and competitive pricing on fiscal 2019 sales and margins.
- Whether the estimated fiscal 2019 tax rate of approximately 24.0% is achieved and how much fiscal 2018 earnings benefited from one-time tax items.
- Exposure from the single-location operating model, cybersecurity, payment systems, and potential business interruptions.