PetMed Express, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2016, representing the first quarter of fiscal 2017. PetMed Express operates a direct-to-consumer pet pharmacy selling prescription and non-prescription medications, health products, and supplies primarily through its website, contact center, television, and print advertising.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Sales | $72.487 million | $71.634 million | Up 1.2% |
| Gross profit | $22.452 million | $22.966 million | Down 2.2% |
| Gross margin | 31.0% | 32.1% | Down 110 basis points |
| Income from operations | $10.400 million | $9.091 million | Up 14.4% |
| Operating margin | 14.4% | 12.7% | Up 170 basis points |
| Net income | $6.594 million | $5.757 million | Up 14.5% |
| Net margin | 9.1% | 8.0% | Up 110 basis points |
| Diluted earnings per share | $0.32 | $0.29 | Up $0.03 |
| Operating cash flow | $13.106 million | $10.811 million | Up 21.2% |
- Cost of sales was $50.035 million, or 69.0% of sales, compared with 67.9% in the prior-year quarter.
- General and administrative expense increased 5.2% to $6.098 million.
- Advertising expense decreased 27.0% to $5.760 million, primarily due to reduced television advertising.
- The effective income tax rate was approximately 37.1%, compared with 37.0% in the prior-year quarter.
- Cash and cash equivalents were $44.307 million at June 30, 2016, compared with $37.639 million at March 31, 2016.
- Working capital was approximately $63.8 million at June 30, 2016, compared with $60.5 million at March 31, 2016.
- The company had no debt obligations at June 30, 2016.
- Dividends declared were $0.19 per common share, compared with $0.18 in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven by higher new-order sales, which increased 10.3% to $13.321 million, and acquisition of approximately 158,000 new customers versus 148,000 in the prior-year quarter.
- Reorder sales declined 0.7% to $59.166 million.
- Internet sales increased 2.9% to $59.350 million and represented approximately 81.9% of sales, compared with 80.5%.
- Gross margin contracted because of higher product costs for certain brands and additional customer discounts.
- Lower advertising spending more than offset the gross-profit decline, increasing operating income and net income.
- Customer acquisition cost declined to approximately $37 from $53, reflecting increased response to advertising.
- Capital expenditures increased to $2.604 million from $110,000, primarily for the planned new headquarters and distribution facility in Delray Beach, Florida.
Liquidity, Capital Allocation, and Outlook
- Operating activities generated $13.106 million of cash. Investing activities used $2.604 million, and financing activities used $3.834 million for dividends. Cash increased by $6.668 million during the quarter.
- The company had approximately $10.2 million remaining under its share repurchase plan at June 30, 2016, but no issuer purchases were reported during the quarter.
- Management forecast approximately $7.0 million of capital expenditures for the remainder of fiscal 2017, expected to be funded with cash from operations.
- Management anticipates advertising expense of approximately 8.0% of sales for fiscal 2017 and an effective tax rate of approximately 37.0%, although both may fluctuate.
- The company plans to relocate its corporate headquarters and distribution facility to Delray Beach during the third quarter of fiscal 2017. The acquired property cost $18.5 million plus closing costs; approximately $2.6 million had been spent on related improvements and equipment by June 30, 2016.
- The board declared a $0.19 per-share dividend on July 25, 2016, estimated at approximately $3.9 million, payable August 19, 2016.
Risks, Contingencies, and Unusual Items
- Sales are seasonal, particularly because of heartworm, flea, and tick medications, and may be adversely affected by increased competition and consumer price sensitivity.
- Future results may be affected by product-cost inflation, customer discounts, advertising availability and effectiveness, and changes in the advertising environment.
- The company has previously settled complaints filed with state pharmacy boards and stated that other states could pursue similar actions. It also litigates to protect its trademarks.
- There were no legal proceedings reported in Part II, Item 1, no off-balance-sheet arrangements, and no defaults or unregistered securities sales.
- Share-based compensation expense increased to $463,000 from $371,000. Unrecognized compensation cost was approximately $3.2 million at June 30, 2016, expected to be recognized over the next three years.
- On July 22, 2016, the board approved 50,000 restricted shares for employees. On July 29, 2016, a new employee equity plan authorizing 1.0 million shares became effective, and 30,000 restricted shares were approved for outside directors.
Investor Verification Checklist
- Verify whether gross-margin pressure from product costs and customer discounts persists in subsequent quarters.
- Monitor reorder-sales trends, customer retention, new-customer acquisition, and the sustainability of the $37 acquisition cost.
- Assess execution, timing, and total cost of the Delray Beach headquarters and distribution-facility relocation.
- Confirm planned fiscal 2017 capital expenditures of approximately $7.0 million and their effect on cash balances.
- Track use of the remaining share repurchase authorization and continuing quarterly dividend payments.
- Review state pharmacy-board, trademark, competitive, seasonal, and pricing risks described in the fiscal 2016 Form 10-K.