PetMed Express, Inc. — Form 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 offering prescription and non-prescription medications, health products, and supplies for dogs and cats. The filing covers the three and nine months ended December 31, 2015, within fiscal 2016. Fiscal year-end is March 31. Financial statements are unaudited and presented in thousands, except per-share amounts.
Financial Performance and Position
| Metric | Three Months Ended Dec. 31, 2015 | Three Months Ended Dec. 31, 2014 | Nine Months Ended Dec. 31, 2015 | Nine Months Ended Dec. 31, 2014 |
|---|---|---|---|---|
| Sales | $50,933 | $49,284 | $179,292 | $179,401 |
| Gross profit | $16,754 | $17,100 | $58,633 | $59,331 |
| Gross margin | 32.9% | 34.7% | 32.7% | 33.1% |
| Income from operations | $7,622 | $7,666 | $23,803 | $19,794 |
| Operating margin | 15.0% | 15.6% | 13.3% | 11.0% |
| Net income | $4,890 | $4,797 | $15,149 | $12,502 |
| Net margin | 9.6% | 9.7% | 8.5% | 7.0% |
| Diluted EPS | $0.24 | $0.24 | $0.75 | $0.62 |
- Nine-month net cash provided by operating activities was $22,635, compared with $29,528 in the prior-year period.
- At December 31, 2015, cash and cash equivalents were $47,129 and short-term investments were $15,608, for total cash and investments of $62,737.
- Working capital was approximately $78.7 million, compared with $73.0 million at March 31, 2015.
- Total liabilities were $7,708 and the company reported no debt obligations.
- Capital expenditures were $177 for the first nine months, compared with $398 in the prior-year period. Management forecast approximately $1.3 million of additional fiscal 2016 capital expenditures.
- Nine-month dividends paid were $10,984. Dividends declared were $0.18 per common share for the quarter and $0.54 per share for the nine-month period.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 3.3% to $50.9 million, driven by higher reorder and new-order sales. Nine-month sales were essentially flat, declining 0.1%.
- Third-quarter reorder sales increased 2.8% and new-order sales increased 6.8%. For the nine-month period, reorder sales increased 1.6%, while new-order sales declined 7.5%.
- New customers acquired increased to approximately 98,000 in the quarter from 96,000, but declined to approximately 374,000 for the nine-month period from 432,000.
- Internet sales represented 81.4% of quarterly sales, compared with 79.8% in the prior-year quarter. The average purchase increased to approximately $78 from $76.
- Gross margin declined because of higher product costs on certain brands and additional customer discounts.
- Advertising expense declined 7.7% in the quarter and 14.3% for the nine-month period, primarily because of reduced television advertising. Customer acquisition cost declined to $41 in the quarter from $45, while the nine-month figure remained $49.
- Nine-month operating income increased 20.3%, largely reflecting lower advertising expense and the absence of the $1.7 million discontinued information-technology project charge recorded in the prior-year period.
- Third-quarter net income increased 1.9%; nine-month net income increased 21.2%. The current-quarter tax provision benefited from a one-time fiscal 2015 tax over-accrual adjustment.
Guidance, Outlook, Risks, 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 37.0%.
- The company expects sales to be affected by increased competition, price sensitivity, and seasonality, particularly for heartworm, flea, and tick medications. The filing provides no specific revenue or earnings guidance.
- On January 19, 2016, the company completed the purchase of Palm Beach County, Florida, property for $18.5 million plus closing costs, funded with cash on hand. The property includes approximately 125,000 square feet of office and warehouse space, approximately 60,000 additional square feet of office and warehouse space, and land for future use. The company intends to occupy approximately 97,000 square feet after renovation.
- As of December 31, 2015, approximately 48% of the acquired property was leased to two tenants, with a remaining weighted-average lease term of 4.2 years.
- The company had approximately $10.2 million remaining under its share repurchase authorization as of December 31, 2015, although no issuer purchases were reported during the quarter.
- The Board subsequently declared a $0.18 per-share dividend payable February 19, 2016, estimated at approximately $3.7 million.
- The CEO’s employment agreement was amended to provide a three-year term beginning March 16, 2016, annual salary of $600,000, and a grant of 120,000 restricted shares. Annual independent-director compensation was increased from $30,000 to $40,000.
- State regulatory complaints had previously been settled; management stated that additional regulatory actions could occur. The company also faces risks related to protecting its trademarks.
- The company reported no legal proceedings in Part II, no off-balance-sheet arrangements, and effective disclosure controls as of December 31, 2015.
Important Facts for Investors to Verify
- Whether gross-margin pressure from product costs and customer discounts persists.
- Whether the decline in new-customer additions and nine-month new-order sales reverses.
- The return on and operating costs associated with the $18.5 million property acquisition and planned renovation.
- Future cash allocation among dividends, the share repurchase authorization, capital expenditures, and operations.
- The effect of competition, pricing pressure, advertising availability, and seasonal demand on sales.
- The company’s regulatory and trademark litigation exposure, including potential actions by state regulatory boards.
- The filing’s caution that quarterly and nine-month results are not necessarily indicative of the full fiscal year.