PetMed Express, Inc. — Fiscal 2022 Q3 Form 10-Q
Business context and reporting period
PetMed Express, Inc. (PetMeds) is a nationwide direct-to-consumer pet pharmacy selling prescription and non-prescription medications, health products, and supplies primarily through its website and contact center. The filing covers the three and nine months ended December 31, 2021, within the fiscal year ending March 31, 2022. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2021 | Three months ended Dec. 31, 2020 | Nine months ended Dec. 31, 2021 | Nine months ended Dec. 31, 2020 |
|---|---|---|---|---|
| Sales | $60.7 million | $65.9 million | $207.4 million | $237.5 million |
| Gross profit | $17.7 million | $19.6 million | $58.7 million | $69.4 million |
| Gross margin | 29.2% | 29.8% | 28.3% | 29.2% |
| Operating income | $5.1 million | $9.3 million | $18.7 million | $29.2 million |
| Operating margin | 8.5% | 14.2% | 9.0% | 12.3% |
| Net income | $4.3 million | $7.6 million | $15.0 million | $23.8 million |
| Diluted EPS | $0.21 | $0.38 | $0.74 | $1.18 |
| Adjusted EBITDA | $7.6 million | $11.0 million | $24.5 million | $34.2 million |
- Sales declined 7.9% year over year in the quarter and 12.7% for the nine-month period. Reorder sales declined 6.5% and 9.2%, respectively; new-order sales declined 22.1% and 37.6%.
- Internet sales represented 84.5% of quarterly sales and 83.8% of nine-month sales.
- Net cash provided by operating activities was $9.8 million for the nine months, down from $21.6 million in the prior-year period. Capital expenditures were $1.3 million, and dividends paid were $18.3 million.
- Cash and cash equivalents were $108.9 million at December 31, 2021, compared with $118.7 million at March 31, 2021. Virtually all cash was invested in money market funds.
- Working capital was approximately $116.6 million. The company had no debt obligations, no material outstanding lease commitments, and no off-balance-sheet arrangements.
- The quarterly dividend declared per common share increased to $0.30 from $0.28 in the comparable prior-year quarter. Approximately $28.7 million remained available under the share repurchase plan; no shares were repurchased during the period.
Material changes versus the prior comparable period
- Profitability weakened materially: quarterly net income fell 44% and nine-month net income fell 37%; adjusted EBITDA declined 31% and 28%, respectively.
- Gross margin decreased 60 basis points in the quarter and 90 basis points for the nine months. Management attributed the pressure partly to manufacturers shifting rebates from product-cost discounts to cooperative marketing rebates.
- Quarterly advertising expense increased 34% to $4.3 million, while advertising cost per acquired customer rose to $81 from $44. For the nine months, cost per acquired customer increased to $73 from $49.
- New-customer acquisition declined to approximately 53,000 in the quarter and 210,000 for the nine months, compared with 73,000 and 356,000, respectively, in the prior-year periods.
- General and administrative expense increased 16.2% in the quarter and 7.1% for the nine months, reflecting higher payroll and stock compensation, professional fees, consulting costs, and certain other expenses.
- Stock-based compensation increased to $3.0 million for the nine months from $2.3 million. Unrecognized compensation cost was $14.4 million at December 31, 2021, expected to be recognized over approximately three years.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide formal revenue or earnings guidance. Management cautioned that sales may be adversely affected by increased competition, price sensitivity, advertising-market conditions, and seasonality.
- COVID-19 had not caused material operational disruptions, although the company experienced some delivery delays for inventory items. Management reported increased veterinary visits as pandemic-related restrictions eased, but prescription renewals affected customer behavior.
- Management forecast approximately $500,000 of capital expenditures for the remainder of fiscal 2022, primarily for the e-commerce platform, funded from operating cash flow.
- The quarterly effective tax rate was 22.9%, compared with 21.6% in the prior-year quarter, partly reflecting a one-time $29,000 tax charge. The prior-year period included a $194,000 tax benefit.
- The company engaged Prophet, a brand and marketing consulting firm whose board includes the company’s chairman, for $292,000; $260,000 was expensed in fiscal 2022. The filing states that the transaction was board-approved and priced comparably to an unrelated-party arrangement.
- State regulatory complaints had been settled in the past, and the company noted that additional state actions cannot be ruled out. The filing reported no current legal proceedings.
- On January 24, 2022, the board declared a $0.30 per-share dividend, estimated at approximately $6.3 million, payable February 18, 2022. In January, the company also issued restricted shares to employees and directors, including directors assigned additional CEO-transition responsibilities.
Important facts for investors to verify
- Whether sales and new-customer acquisition stabilize after the significant year-over-year declines.
- Whether higher advertising costs and competitive pricing continue to compress operating and gross margins.
- The sustainability of dividends and potential share repurchases relative to operating cash flow, cash reserves, and capital needs.
- The timing and future impact of the $14.4 million in unrecognized stock-based compensation expense.
- Inventory availability, supplier rebate structures, delivery delays, and the effects of seasonality.
- Potential future state regulatory actions, trademark litigation outcomes, and the effect of the company’s CEO transition.
- The filing’s non-GAAP adjusted EBITDA measure alongside GAAP earnings and cash flow, since adjusted EBITDA excludes recurring stock-based compensation and other expenses.