PetMed Express, Inc. — Form 10-Q Summary
Business context and reporting period
PetMed Express, Inc., operating as 1-800-PetMeds, markets prescription and non-prescription pet medications, health products, and supplies directly to consumers, primarily in the United States. The filing covers the quarter and six months ended September 30, 2019, within fiscal 2020. Fiscal year-end is March 31. The financial statements are unaudited.
Financial performance and condition
| Metric | Three months ended September 30, 2019 | Three months ended September 30, 2018 | Six months ended September 30, 2019 | Six months ended September 30, 2018 |
|---|---|---|---|---|
| Sales | $69.9 million | $71.4 million | $149.9 million | $158.8 million |
| Gross profit | $20.0 million | $25.3 million | $41.9 million | $55.2 million |
| Gross margin | 28.6% | 35.4% | 27.9% | 34.8% |
| Income from operations | $8.4 million | $13.2 million | $14.5 million | $29.0 million |
| Operating margin | 12.0% | 18.5% | 9.7% | 18.2% |
| Net income | $6.7 million | $10.8 million | $12.0 million | $23.3 million |
| Diluted EPS | $0.33 | $0.52 | $0.60 | $1.14 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $17.3 million | $20.4 million |
- At September 30, 2019, cash and cash equivalents were $94.9 million, compared with $100.5 million at March 31, 2019.
- Working capital was $99.7 million, compared with $107.8 million at March 31, 2019.
- Total liabilities were $19.9 million and the company reported no debt obligations.
- Capital expenditures were $416,000 during the six months. The company forecasts approximately $4.6 million of capital expenditures for the remainder of fiscal 2020, primarily for its e-commerce platform.
- Cash used in financing activities was $22.5 million, including $11.5 million for repurchases of approximately 613,000 common shares and $11.0 million of dividends paid.
- Quarterly dividends declared were $0.27 per common share in both comparable quarters; six-month dividends declared were $0.54 per share in 2019 and $0.52 per share in 2018.
Material changes versus the prior comparable period
- Quarterly sales declined 2.0%; six-month sales declined 5.6%.
- New-order sales fell 22.4% in the quarter and 22.7% for the six-month period. Reorder sales increased 1.4% in the quarter but decreased 2.2% for the six months.
- New customers acquired decreased to approximately 98,000 in the quarter from 117,000 and to 238,000 for the six months from 286,000.
- Internet sales decreased 3.1% in the quarter and 6.8% for the six months, while contact-center sales increased 3.5% and 1.2%, respectively.
- Cost of sales increased 8.2% in the quarter and 4.3% for the six months despite lower sales. Management attributed the increase primarily to customer price reductions intended to respond to online competition and higher product costs.
- Gross profit decreased 20.8% in the quarter and 24.2% for the six months, with gross margin declining 6.8 and 6.9 percentage points, respectively.
- Advertising expense decreased 10.3% in the quarter because television advertising was eliminated, but increased 11.4% for the six months because television advertising was reinstated in the June quarter. Customer acquisition cost increased to $49 from $45 for the quarter and to $56 from $42 for the six months.
- Net income decreased 38.0% in the quarter and 48.5% for the six months. The effective tax rate increased to 27.0% from 22.6% for the quarter and to 25.5% from 23.1% for the six months, partly due to the tax impact of restricted stock compensation.
- The company adopted the new lease accounting standard on April 1, 2019. It recognized approximately $220,000 of current operating lease liability and a corresponding right-of-use asset; management stated the impact was not material.
Guidance, outlook, risks and unusual items
- Management currently anticipates advertising expense at approximately 9.0% of fiscal 2020 sales, subject to quarterly seasonality and advertising availability.
- Management expects to fund planned capital expenditures through cash from operations and stated it has no current need or plans to obtain additional capital.
- Management identified increased competition, consumer price sensitivity, advertising-market conditions, and seasonality in heartworm and flea-and-tick products as risks to sales and margins. The filing provides no formal revenue or earnings guidance.
- Direct purchasing relationships with all major manufacturers and manufacturers’ minimum advertised price policies may help improve future product costs and gross margins, but no improvement is assured.
- The company settled one website accessibility class action for $8,500. A separate accessibility matter involved a proposed confidential settlement requiring website modifications within 24 months and a $10,000 payment, subject to court execution of the proposed consent decree.
- The company stated that it has no material off-balance-sheet arrangements and no material outstanding lease commitments. Legal and regulatory actions by state pharmacy boards and intellectual-property disputes remain potential risks.
- On October 21, 2019, the board declared a $0.27-per-share dividend, estimated at approximately $5.4 million, payable November 15, 2019.
Important facts for investors to verify
- Whether the decline in new-customer acquisition and new-order sales persists and affects future revenue growth.
- Whether price competition and higher product costs continue to pressure gross margin.
- Execution of the company’s e-commerce investment plan and the approximately $4.6 million remaining fiscal 2020 capital expenditure forecast.
- Completion and terms of the pending website accessibility consent decree and any related compliance costs.
- Use of the remaining approximately $28.7 million share-repurchase authorization alongside dividends and operating cash needs.
- The filing’s statement that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.