PetMed Express, Inc. Form 10-Q Summary
Business context and reporting period
PetMed Express, Inc., doing business as 1-800-PetMeds, is a nationwide direct-to-consumer pet pharmacy selling prescription and non-prescription medications, health products, and supplies for dogs and cats. The company markets primarily through television, online, and direct-mail advertising. This report covers the quarter and nine months ended December 31, 2012, within fiscal 2013. Fiscal year-end is March 31.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2012 | Three months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Sales | $49.6 million | $50.5 million | $176.7 million | $182.3 million |
| Gross profit | $17.2 million | $17.2 million | $58.9 million | $61.2 million |
| Gross margin | 34.7% | 34.0% | 33.3% | 33.6% |
| Operating income | $7.2 million | $6.1 million | $19.7 million | $19.7 million |
| Operating margin | 14.5% | 12.1% | 11.2% | 10.8% |
| Net income | $4.6 million | $3.9 million | $12.6 million | $12.7 million |
| Diluted EPS | $0.23 | $0.19 | $0.63 | $0.61 |
- Quarterly sales declined 1.8%; nine-month sales declined 3.1%.
- Quarterly net income increased 17.4%, while nine-month net income decreased 0.8%.
- Quarterly advertising expense decreased 15.5% to $4.6 million; nine-month advertising expense decreased 6.7% to $21.9 million.
- Net cash provided by operating activities was $21.8 million for the nine months, compared with $13.7 million in the prior-year period.
- Cash and cash equivalents were $30.0 million at December 31, 2012, compared with $46.8 million at March 31, 2012. Short-term investments were $15.5 million, producing total cash and short-term investments of $45.5 million.
- Working capital was $59.2 million at December 31, 2012, compared with $78.2 million at March 31, 2012.
- The company had no debt obligations and no off-balance-sheet arrangements. It expects approximately $100,000 of capital expenditures for the remainder of fiscal 2013.
Material changes versus the prior comparable period
- Sales weakness was concentrated in new orders: quarterly new-order sales fell 13.8% to $8.7 million, and nine-month new-order sales fell 13.8% to $34.3 million. Reorder sales were comparatively stable.
- The company acquired approximately 131,000 new customers in the quarter and 504,000 in the nine months, compared with 150,000 and 560,000, respectively, in the prior-year periods.
- Sales were adversely affected by the unavailability of Novartis products following the manufacturer’s production suspension, increased competition, lower average order sizes, and a shift toward lower-priced products and generics.
- Quarterly gross margin improved to 34.7%, primarily from product mix, while nine-month gross margin declined to 33.3%, mainly because of higher shipping expenses.
- Cash flow improved primarily because inventory declined by $7.5 million during the nine months, compared with an inventory increase in the prior-year period.
- Financing cash outflows included $28.9 million of dividends and $3.9 million of share repurchases. The company declared $1.150 per share of dividends during the quarter and $1.450 per share during the nine-month period, compared with $0.125 and $0.375, respectively, in the prior-year periods.
Guidance, outlook, risks, contingencies, and unusual items
- Management estimated a fiscal 2013 effective tax rate of approximately 37.0% and expects advertising expense to be approximately 12% to 13% of sales, subject to seasonality and advertising availability.
- The quarterly effective tax rate increased to 37.7% from 36.8% because of a one-time charge related to an under-accrual of fiscal 2012 income taxes.
- Management plans to focus on advertising efficiency, higher-margin products including generics, and expanded pet-supply offerings. It cautioned that increased competition, consumer price sensitivity, trading down, product availability, and advertising-market conditions could adversely affect sales.
- Sales are seasonal, particularly for heartworm and flea-and-tick medications, and future results may not be indicative of full-year performance.
- The company had approximately $10.2 million remaining under its share-repurchase authorization at December 31, 2012 and may use cash for repurchases, dividends, or operations.
- On January 25, 2013, the board declared a $0.15 per-share quarterly dividend, estimated at approximately $3.0 million, payable February 22, 2013.
- On January 25, 2013, the company amended the CEO’s employment agreement for a three-year term beginning March 16, 2013, maintained annual salary at $550,000, and provided for a grant of 108,000 restricted shares.
- Prior complaints filed with state pharmacy boards had been settled, but the company stated that additional state actions could occur. The company also engages in trademark-protection litigation and may not always succeed.
- Management reported effective disclosure controls and no significant changes in internal control over financial reporting. No legal proceedings were reported in Part II, Item 1.
Important facts for investors to verify
- Whether new-customer acquisition and new-order sales recover after the Novartis supply disruption and amid heightened competition.
- Whether lower average order values and increased generic sales sustain or pressure gross margins, including the effect of shipping costs.
- The sustainability of the elevated dividend policy and continued share repurchases relative to operating cash flow and the $45.5 million of cash and short-term investments.
- The impact of seasonal demand and television advertising availability on fourth-quarter and full-year results.
- Potential future pharmacy-board actions, trademark litigation outcomes, and other contingencies not quantified in the filing.