PETMED EXPRESS INC quarterly report, Q1 FY2018

PetMed Express, Inc. Form 10-Q Summary

Business Context and Reporting Period

PetMed Express, Inc., operating primarily 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, 2017, the first quarter of fiscal 2018. Fiscal year-end is March 31. The financial statements are unaudited.

Approximately 84% of sales were generated through the Internet, compared with 82% in the prior-year quarter.
The average purchase increased to approximately $87 from $82.
The Company acquired approximately 169,000 new customers, compared with approximately 158,000.

Financial Performance and Position

Metric	Q1 FY2018	Q1 FY2017	Change
Sales	$79.7 million	$72.5 million	9.9% increase
Gross profit	$27.5 million	$22.5 million	22% increase
Gross margin	34.5%	31.0%	350 basis-point increase
Income from operations	$14.4 million	$10.4 million	38.6% increase
Net income	$9.3 million	$6.6 million	40.7% increase
Diluted EPS	$0.45	$0.32	Increase
Operating cash flow	$13.9 million	$13.1 million	Increase

Cost of sales was $52.2 million, or 65.5% of sales, versus 69.0% in the prior-year quarter. Management attributed the improvement primarily to a shift toward higher-margin products, partly offset by additional customer discounts.
Advertising expense increased 9.2% to $6.3 million and remained 7.9% of sales. Customer acquisition cost was approximately $37, unchanged from the prior-year quarter.
General and administrative expense increased 2.1% to $6.2 million. Depreciation increased to $531,000 from $194,000, principally because the new headquarters and distribution facility entered service in fiscal 2017.
The effective tax rate was approximately 37.1% in both periods.
Cash and cash equivalents were $68.5 million at June 30, 2017, compared with $58.7 million at March 31, 2017. Total assets were $125.7 million and total shareholders’ equity was $99.0 million.
The Company had no debt obligations and no off-balance-sheet arrangements.
Working capital was $69.5 million, compared with $63.4 million at March 31, 2017.
Inventories increased to $23.0 million from $20.2 million at March 31, 2017.
Cash used in investing activities was $43,000, compared with $2.6 million in the prior-year quarter. Cash used in financing activities was $4.1 million, consisting primarily of dividends paid.
The quarterly dividend declared was $0.20 per common share, compared with $0.19 in the prior-year quarter.

Material Changes Versus the Prior Comparable Period

Sales growth reflected higher reorder and new-order sales. Reorder sales increased 9.0% to $64.5 million, while new-order sales increased 14.0% to $15.2 million.
Internet sales increased 12.3% to $66.6 million; contact-center sales declined 1.0% to $13.0 million.
Gross margin expanded materially, driving stronger operating and net-income growth than sales growth.
Advertising spending increased in line with sales and was intended to stimulate demand and acquire new customers.
Capital spending declined substantially because major investments in the new headquarters and distribution facility occurred in the prior fiscal year.
Net cash increased $9.8 million during the quarter, ending at $68.5 million.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

Management anticipates advertising expense of approximately 7.0% to 8.0% of sales for fiscal 2018, although quarterly results may vary because of seasonality and advertising availability.
The Company forecasts approximately $1.0 million of capital expenditures for the remainder of fiscal 2018, funded from operating cash flow.
Management expects to use cash for the remaining share-repurchase authorization, quarterly dividends, or operating activities. Approximately $10.2 million remained under the share-repurchase plan at June 30, 2017; no shares were repurchased during the quarter.
The business is seasonal, particularly because of heartworm and flea-and-tick medications. Management also warned that increased competition and greater consumer price sensitivity could adversely affect sales and margins.
The Company early adopted ASU 2016-09 on stock compensation. The standard may materially affect the effective tax rate in fiscal 2018 when restricted shares vest, depending partly on the Company’s stock price.
The Company expects to adopt the revenue-recognition standard using the modified retrospective method and does not currently expect a material financial impact, other than increased disclosures. The assessment was not yet complete.
In June 2017, a veterinary clinic filed a putative class-action lawsuit alleging unsolicited fax advertising in violation of the Telephone Consumer Protection Act. The Company disputes the allegations; the possible outcome and loss cannot currently be estimated.
The Board declared a $0.20-per-share dividend on July 24, 2017, payable August 18, 2017, with an estimated total payable of approximately $4.1 million. On July 28, 2017, the Board approved 79,200 restricted shares for employees and independent directors.
Management stated that disclosure controls and procedures were effective and that no material changes occurred in internal control over financial reporting during the quarter.

Important Facts for Investors to Verify

Whether gross-margin improvement from product mix is sustainable amid increased discounts and competitive pricing.
Trends in reorder rates, new-customer acquisition, Internet sales, and the approximately $37 customer-acquisition cost.
The potential tax-rate volatility from ASU 2016-09 and restricted-share vesting.
The status, class-certification prospects, and potential exposure from the Telephone Consumer Protection Act lawsuit.
Future use of the $68.5 million cash balance, including dividends, share repurchases, and capital expenditures.
Inventory growth, seasonal demand, and potential obsolescence reserves.
Any material impact from the pending adoption of the new revenue-recognition standard.