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 for dogs and cats. This Form 10-Q covers the quarter and six months ended September 30, 2016, the second quarter and first six months of fiscal 2017. Approximately 82% of quarterly sales were generated through the Internet.
Financial performance and position
| Metric | Three months ended Sept. 30, 2016 | Three months ended Sept. 30, 2015 | Six months ended Sept. 30, 2016 | Six months ended Sept. 30, 2015 |
|---|---|---|---|---|
| Sales | $60.8 million | $56.7 million | $133.3 million | $128.4 million |
| Gross profit | $18.1 million | $18.9 million | $40.5 million | $41.9 million |
| Gross margin | 29.7% | 33.3% | 30.4% | 32.6% |
| Operating income | $7.7 million | $7.1 million | $18.1 million | $16.2 million |
| Operating margin | 12.7% | 12.5% | 13.6% | 12.6% |
| Net income | $4.9 million | $4.5 million | $11.5 million | $10.3 million |
| Net margin | 8.1% | 7.9% | 8.6% | 8.0% |
| Diluted EPS | $0.24 | $0.22 | $0.56 | $0.51 |
Six-month net cash provided by operating activities was $27.8 million, compared with $14.0 million in the prior-year period. Capital expenditures were $5.9 million, primarily related to the new Delray Beach headquarters and distribution facility. Dividends paid were $7.8 million, and cash increased to $51.9 million from $37.6 million at March 31, 2016.
At September 30, 2016, total assets were $96.5 million and total liabilities were $8.6 million. The company reported no debt obligations and no off-balance-sheet arrangements. Working capital was approximately $66.0 million. Most cash and cash equivalents were invested in money market funds.
Material changes versus the prior comparable period
- Quarterly sales increased 7.2%; six-month sales increased 3.8%, driven by higher new-order and reorder sales.
- New customers increased to approximately 131,000 in the quarter from 127,000, and to 289,000 for the six months from 275,000.
- Cost of sales rose faster than revenue, reducing gross margin by 360 basis points in the quarter and 220 basis points for the six months. Management attributed the decline to higher product costs on certain brands and additional customer discounts.
- Advertising expense declined 30% for the quarter and 28% for the six months following the elimination of television advertising. Customer acquisition cost declined to $33 per customer for the quarter and $35 for the six months, versus $49 and $51, respectively.
- Operating income and net income increased despite lower gross profit because of reduced advertising spending.
- General and administrative expense increased 6.7% in the quarter and 5.9% for the six months, primarily due to higher payroll, bank service fees, and credit-card chargeback-related bad debt expense.
- The company purchased and is renovating a Delray Beach property for its headquarters and distribution facility. Approximately $5.8 million of related improvements and equipment was recorded as a prepaid current asset at September 30, 2016.
Guidance, outlook, risks, contingencies, and unusual items
- Management anticipated advertising expense of approximately 7.0% of fiscal 2017 sales and an effective tax rate of approximately 37.0%.
- Approximately $4.0 million of additional fiscal 2017 capital expenditures was forecast for the remainder of the year, to be funded from operating cash flow.
- The company planned to relocate its corporate headquarters and distribution facility to Delray Beach in the third quarter of fiscal 2017 and expected to occupy approximately 97,000 square feet of the acquired property.
- Management noted risks from increased competition, consumer price sensitivity, advertising-market conditions, and seasonality in heartworm, flea, and tick products. Results for the quarter and six months are not necessarily indicative of full-year results.
- The company had approximately $10.2 million remaining under its share repurchase authorization, although no shares were repurchased during the six-month period. Cash may be used for repurchases, dividends, operating activities, or capital expenditures.
- On October 24, 2016, the board declared a $0.19-per-share quarterly dividend, estimated at approximately $3.9 million, payable November 18, 2016 to shareholders of record November 7, 2016.
- There were no legal proceedings reported in Part II, Item 1. Management stated that prior state regulatory complaints had been settled, but similar actions could arise in the future.
- The company adopted a new 2016 Employee Equity Compensation Restricted Stock Plan authorizing 1.0 million shares. Unrecognized restricted-stock compensation was approximately $4.3 million at September 30, 2016.
Important facts for investors to verify
- Whether gross-margin pressure from product costs and customer discounts persists or reverses.
- Whether lower advertising spending can sustain new-customer acquisition and future sales growth.
- The timing, final cost, and operating impact of the Delray Beach facility relocation and renovation.
- Execution of the approximately $4.0 million remaining fiscal 2017 capital-expenditure plan.
- Future use of cash for dividends and share repurchases, including the remaining $10.2 million authorization.
- Potential regulatory or litigation exposure involving state boards and protection of the company’s trademarks.
- Seasonal sales patterns and the effect of competition and price sensitivity on demand and margins.