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 filing covers the three months ended June 30, 2012, the first quarter of fiscal 2013. Fiscal year-end is March 31. Approximately 77% of sales were generated through the Internet, compared with 73% in the prior-year quarter.
Financial Highlights
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Sales | $69.0 million | $73.6 million | Down 6.3% |
| Gross profit | $22.3 million | $24.1 million | Down 7.5% |
| Gross margin | 32.4% | 32.8% | Down 0.4 percentage points |
| Operating income | $6.2 million | $7.6 million | Down 18.0% |
| Operating margin | 9.0% | 10.3% | Down 1.3 percentage points |
| Net income | $4.0 million | $4.8 million | Down 18.3% |
| Net margin | 5.7% | 6.6% | Down 0.9 percentage points |
| Diluted EPS | $0.20 | $0.22 | Down $0.02 |
| Operating cash flow | $13.8 million | $8.5 million | Up $5.3 million |
Cost of sales was $46.7 million, or 67.6% of sales, compared with 67.2% in the prior-year quarter. Operating expenses declined to $16.1 million from $16.5 million, but increased to 23.4% of sales from 22.5%. Advertising expense was $9.9 million, or 14.3% of sales, and general and administrative expense was $5.9 million, or 8.6% of sales.
At June 30, 2012, cash and cash equivalents were $57.4 million and short-term investments were $10.4 million. Working capital was $79.6 million, compared with $78.2 million at March 31, 2012. Total liabilities were $11.9 million, consisting primarily of current liabilities; the company reported no debt obligations. Shareholders’ equity was $82.6 million.
Cash flow from investing activities was an outflow of $0.2 million, primarily for $0.2 million of capital expenditures. Financing activities used $3.0 million for dividends. The company paid approximately $3.0 million in dividends during the quarter and had approximately $14.0 million remaining under its share repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Sales declined $4.6 million, primarily because Novartis suspended production of several animal-health brands, including Sentinel, Interceptor, Program, Deramaxx, and Clomicalm.
- New-order sales decreased 18.1% to $13.9 million, while reorder sales decreased 2.8% to $55.1 million. New customers acquired declined to approximately 197,000 from approximately 226,000.
- Average order size declined to approximately $73 from $80, reflecting smaller purchase quantities, discounts, product mix changes, and increased competition.
- Gross margin contracted because of higher shipping expenses. Advertising expense declined in dollars but rose as a percentage of sales, and customer acquisition cost increased to $50 from $45.
- Operating cash flow improved primarily because inventory decreased by $7.9 million, compared with an inventory-related use of cash in the prior-year quarter.
- Financing cash outflows were substantially lower because the company repurchased no shares in the current quarter, compared with $13.6 million of treasury-stock purchases in the prior-year quarter.
- Internet sales increased to 76.6% of reported sales from 73.5%, while contact-center sales declined 17.2%.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management estimated advertising expense at approximately 13% of sales for fiscal 2013, subject to quarterly seasonality and advertising availability.
- Management estimated an effective tax rate of approximately 37.0% for fiscal 2013.
- The company expects approximately $300,000 of capital expenditures for the remainder of fiscal 2013, funded from operating cash flow.
- Management plans to emphasize advertising efficiency, higher-margin products, and expanded pet-supply offerings. It cautioned that increased competition, price sensitivity, trading down to smaller quantities or less expensive brands, and reduced product availability could adversely affect sales.
- Novartis product-production disruptions were industry-wide and product availability remained uncertain. A prolonged disruption could negatively affect future sales.
- Sales are seasonal, particularly for heartworm and flea-and-tick products. The filing states that fiscal 2012 quarterly sales represented approximately 31%, 24%, 21%, and 24% of annual sales, respectively.
- A patent lawsuit involving electronic catalog systems was dismissed after the company entered into a licensing agreement in May 2012 for a confidential amount, without admitting liability or wrongdoing.
- The company stated that it had settled prior complaints with various state pharmacy boards but could face similar actions in the future. No legal proceedings were reported in Part II.
- On July 27, 2012, the board approved approximately 87,000 restricted shares for employees and outside directors. On July 30, 2012, it declared a $0.15-per-share dividend, estimated at approximately $3.1 million, payable August 24, 2012.
- Management reported effective disclosure controls and no significant changes in internal control over financial reporting. No off-balance-sheet arrangements were reported.
Important Facts for Investors to Verify
- Whether Novartis product availability improves and whether substitute products recover lost sales.
- Whether declining average order size, lower new-customer additions, and increased customer-acquisition costs persist.
- Whether gross margin recovers from the 32.4% reported for the quarter, particularly as shipping costs and product mix change.
- Whether the company maintains its projected approximately 13% advertising-to-sales ratio and approximately 37% effective tax rate.
- The sustainability of operating cash flow and the allocation of the company’s $67.7 million cash and short-term investment balance among dividends, share repurchases, and operations.
- The terms and financial impact of the confidential patent litigation licensing agreement.
- Seasonality and the risk that quarterly results may not be indicative of full-year fiscal 2013 performance.