PetMed Express, Inc. — Form 10-Q Summary
Business context and reporting period
PetMed Express, Inc., operating 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. The filing covers the quarter and nine months ended December 31, 2018, within fiscal 2019. The financial statements are unaudited.
Key financial metrics
| Metric | Three months ended Dec. 31, 2018 | Three months ended Dec. 31, 2017 | Nine months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Sales | $60.1 million | $60.1 million | $218.9 million | $206.5 million |
| Gross profit | $19.4 million | $21.9 million | $74.6 million | $72.9 million |
| Gross margin | 32.3% | 36.5% | 34.1% | 35.3% |
| Income from operations | $9.4 million | $11.5 million | $38.4 million | $38.1 million |
| Net income | $7.8 million | $9.1 million | $31.1 million | $27.1 million |
| Net margin | 13.0% | 15.1% | 14.2% | 13.1% |
| Diluted EPS | $0.38 | $0.44 | $1.52 | $1.33 |
| Dividends declared per common share | $0.27 | $0.20 | $0.79 | $0.60 |
For the nine months, net cash provided by operating activities was $32.0 million, compared with $35.1 million in the prior-year period. Capital expenditures were $0.5 million, dividends paid were $16.3 million, and cash increased by $15.2 million to $93.2 million.
At December 31, 2018, total assets were $156.9 million, including $93.2 million of cash and cash equivalents and $32.2 million of inventory. Total liabilities were $24.1 million, and shareholders’ equity was $132.9 million. The Company reported no debt obligations and no off-balance-sheet arrangements. Working capital was $105.4 million.
Material changes versus the prior comparable period
- Quarterly sales were essentially flat, declining $42,000, or 0.1%. Nine-month sales increased $12.4 million, or 6.0%, driven primarily by reorder sales.
- Quarterly reorder sales increased 4.6%, while new-order sales declined 26.0%. For the nine months, reorder sales increased 9.0% and new-order sales declined 8.3%.
- New customer additions declined to approximately 81,000 in the quarter from 106,000 and to approximately 366,000 for the nine months from 408,000.
- Cost of sales increased faster than sales, reaching 67.7% of quarterly sales versus 63.5% in the prior year and 65.9% for the nine months versus 64.7%.
- Gross profit declined 11.7% in the quarter despite flat sales, primarily due to increased customer discounts and product costs. Nine-month gross profit increased 2.3%, but gross margin declined 120 basis points.
- Quarterly operating income declined 17.9% and net income declined 14.1%. For the nine months, operating income increased 0.6% and net income increased 14.8%.
- Advertising expense declined 12.3% in the quarter but increased 4.6% for the nine months. Customer acquisition cost rose to $45 in the quarter and $43 for the nine months, compared with $39 and $37, respectively.
- The nine-month effective tax rate declined to 23.2% from 31.1%, primarily reflecting the lower federal corporate tax rate under the Tax Cuts and Jobs Act.
Guidance, outlook, risks and unusual items
- Management expects advertising expense to be approximately 7.0% to 8.0% of fiscal 2019 sales, subject to quarterly seasonality and advertising availability.
- Management expects approximately $250,000 of capital expenditures for the remainder of fiscal 2019, funded through operating cash flow.
- Management cites increased online competition, price sensitivity, higher product costs, customer discounting, and weaker-than-expected advertising response as pressures on sales and margins.
- Sales are seasonal, particularly because of heartworm and flea-and-tick medications. Management states that future sales growth is not assured.
- The Company adopted ASC 606 revenue recognition on April 1, 2018 using the modified retrospective method; no opening retained earnings or balance-sheet adjustment was required.
- On January 22, 2019, the Board declared a $0.27 per-share quarterly dividend, estimated at approximately $5.6 million, payable February 15, 2019.
- On January 25, 2019, the Board authorized an additional $30.0 million for share repurchases, increasing total authorization for future repurchases to $40.2 million. Approximately $10.2 million remained under the prior authorization at December 31, 2018.
- The Company reports no material outstanding lease commitments, no current need for additional capital, and no legal proceedings reported in Part II. Prior state regulatory complaints had been settled, but similar actions could arise in the future.
- Interest income increased because of higher interest rates and larger cash balances; it may decline if cash is used for repurchases, dividends, or operations.
Facts investors should verify
- Whether margin pressure from discounts, product costs, and online competition persists into the remainder of fiscal 2019.
- Whether the decline in new customers and increased customer acquisition costs affects future reorder growth.
- The pace and execution of the expanded $40.2 million share-repurchase authorization and its effect on cash and interest income.
- The sustainability of the $0.27 quarterly dividend given operating cash flow, inventory investment, and repurchase activity.
- The filing’s revenue-note tables refer to periods ended December 30, while the financial statements and filing period are December 31; investors should confirm the intended dates.
- Inventory growth to $32.2 million and the adequacy of the inventory obsolescence reserve, which increased to approximately $81,000 from $58,000 at March 31, 2018.