PetMed Express, Inc. 10-Q Summary
Business Context and Reporting Period
PetMed Express, Inc., doing business 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 quarter and six months ended September 30, 2015, representing the second quarter and first six months of fiscal 2016. Comparisons are with the corresponding 2014 periods.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Six Months Ended September 30 |
|---|---|---|
| Sales | $56.7 million, down 1.5% | $128.4 million, down 1.4% |
| Gross profit | $18.9 million; 33.3% margin | $41.9 million; 32.6% margin |
| Income from operations | $7.1 million; 12.5% margin | $16.2 million; 12.6% margin |
| Net income | $4.5 million; 7.9% margin | $10.3 million; 8.0% margin |
| Diluted EPS | $0.22 | $0.51 |
| Operating cash flow | Not separately provided | $14.0 million |
- Cash and cash equivalents were $42.2 million at September 30, 2015, compared with $35.6 million at March 31, 2015. Short-term investments were $15.6 million.
- Total assets were $88.4 million and shareholders’ equity was $79.2 million at September 30, 2015.
- Total liabilities were $9.2 million, consisting primarily of current liabilities. The company reported no debt obligations.
- Working capital was $76.9 million, compared with $73.0 million at March 31, 2015.
- Six-month investing cash outflow was $0.2 million, and financing cash outflow was $7.3 million, primarily for dividends.
- Dividends declared per common share increased to $0.18 for the quarter and $0.36 for the six-month period, compared with $0.17 and $0.34, respectively, in the prior-year periods.
Material Changes Versus Prior Comparable Period
- Sales declined modestly because of lower new-order sales, partially offset by higher reorder sales. New-order sales fell 8.0% in the quarter and 11.4% for the six-month period, while reorder sales increased 0.1% and 1.0%, respectively.
- New customers acquired declined to approximately 127,000 in the quarter from 152,000 and to approximately 275,000 for six months from 336,000.
- Internet sales represented approximately 81% of quarterly sales, compared with 80% in the prior-year quarter. Average purchase size increased to approximately $80 per order from $75 for the quarter and to $81 from $77 for six months.
- Gross margin improved by 1.2 percentage points in the quarter and 0.1 percentage point for six months, primarily from a shift toward higher-margin products.
- Advertising expense declined 9.6% in the quarter and 15.9% for six months, primarily due to reduced television advertising. The lower spending also contributed to fewer new customers.
- Operating income increased 65.3% in the quarter and 33.4% for six months. Net income increased 64.8% and 33.1%, respectively.
- The prior-year quarter included a $1.7 million charge for discontinuing an information technology project, with a $1.1 million after-tax impact, or $0.05 diluted EPS. No such charge occurred in 2015, and no further project expenditures are expected.
- Operating cash flow decreased from $23.6 million to $14.0 million for six months, largely reflecting the absence of the prior-year working-capital benefit from inventory changes, despite higher net income.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management anticipated advertising expense of approximately 10% of fiscal 2016 sales, subject to seasonality and advertising availability.
- Management estimated a fiscal 2016 effective tax rate of approximately 37%.
- Approximately $1.3 million of capital expenditures was forecast for the remainder of fiscal 2016, expected to be funded from operating cash flow.
- Management identified increased competition and greater consumer price sensitivity as potential pressures on sales. Product demand is seasonal, particularly for heartworm, flea, and tick medications.
- The company had approximately $10.2 million remaining under its share repurchase authorization at September 30, 2015, although no issuer purchases were reported during the quarter.
- On October 19, 2015, the board declared a $0.18 per-share dividend, estimated at approximately $3.7 million, payable November 13, 2015 to shareholders of record November 2, 2015.
- State regulatory complaints had been settled in the past, but similar actions could be pursued by other states. The company also initiates litigation to protect its trademarks and may not always be successful.
- The company had no legal proceedings reported in Part II, no off-balance-sheet arrangements, and no outstanding lease commitments other than the lease for its 65,300-square-foot facility.
- Cash and short-term investments are exposed principally to interest-rate, credit, and market-value risk. The company held no derivative instruments.
- Management concluded that disclosure controls and procedures were effective and reported no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether reduced advertising and new-customer acquisition will constrain future sales growth despite stable reorder activity.
- Whether the improved gross margin from product mix is sustainable.
- The effect of seasonal demand, competition, and consumer price sensitivity on quarterly results.
- Future use of cash for dividends, share repurchases, capital expenditures, and operating needs.
- Interest-rate and credit-market exposure related to the $15.6 million short-term investment portfolio.
- Potential future state regulatory actions and trademark litigation outcomes.
- Whether operating cash flow remains sufficient to fund the planned capital expenditures and shareholder distributions.