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. The filing covers the three months ended June 30, 2014, the first quarter of fiscal 2015. The comparable period is the three months ended June 30, 2013. Approximately 80% of sales were generated through the Internet, versus 78.7% in the prior-year quarter.
Key Financial Metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Sales | $72.5 million | $74.2 million | Down 2.2% |
| Gross profit | $23.8 million | $24.0 million | Down 1.0% |
| Gross margin | 32.8% | 32.4% | Up 40 basis points |
| Operating income | $7.8 million | $7.5 million | Up 4.5% |
| Operating margin | 10.8% | 10.1% | Up 70 basis points |
| Net income | $5.0 million | $4.8 million | Up 4.6% |
| Net margin | 6.9% | 6.4% | Up 50 basis points |
| Diluted earnings per share | $0.25 | $0.24 | Up $0.01 |
| Operating cash flow | $14.3 million | $19.8 million | Down $5.6 million |
| Cash dividends declared per share | $0.17 | $0.15 | Up $0.02 |
At June 30, 2014, cash and cash equivalents were $29.1 million and short-term investments were $15.6 million, for combined liquid funds of $44.7 million. Working capital was $67.9 million, compared with $66.1 million at March 31, 2014. The company had no outstanding debt and no off-balance-sheet arrangements.
Total assets were $86.0 million and total liabilities were $13.9 million at June 30, 2014. Inventory was $32.9 million, down from $35.7 million at March 31, 2014. Net cash used in investing activities was $26,000, while net cash used in financing activities was $3.4 million, primarily for dividends.
Material Changes Versus the Prior Comparable Period
- Sales declined $1.7 million, primarily because of lower new-order and reorder sales. New-order sales declined 7.7% and reorder sales declined 0.8%.
- New customers acquired decreased to approximately 184,000 from 207,000. Customer acquisition cost increased to $54 from $50.
- Cost of sales declined 2.8%, and cost of sales as a percentage of sales improved to 67.2% from 67.6%, attributed primarily to lower product costs for certain brands.
- Advertising expense declined 4.8% to $9.9 million and decreased to 13.7% of sales from 14.0%.
- General and administrative expense was essentially unchanged at approximately $5.9 million and included a $53,000 one-time state and county sales-tax charge.
- Operating income and net income increased despite lower sales, reflecting improved gross and operating margins and lower advertising and depreciation expense.
- Operating cash flow decreased primarily because the prior-year period benefited from a larger inventory reduction.
- Dividends paid increased to $3.4 million from $3.0 million. The company had approximately $10.2 million remaining under its share repurchase authorization, although no shares were repurchased during the quarter.
Guidance, Outlook, Risks, and Unusual Items
- Management estimated advertising expense would be approximately 12% of sales for fiscal 2015, subject to quarterly seasonality and advertising availability.
- Management estimated a fiscal 2015 effective tax rate of approximately 37%.
- Approximately $2.8 million of capital expenditures were forecast for the remainder of fiscal 2015, expected to be funded from operating cash flow.
- Management cautioned that sales may be adversely affected by increased competition and greater consumer price sensitivity. Sales are also seasonal, particularly for heartworm, flea, and tick medications.
- Future results may be affected by advertising-market conditions, customer-acquisition costs, product pricing, inventory obsolescence, and interest rates affecting cash and short-term investments.
- Past complaints filed with state pharmacy boards have been settled, but the company stated that other states could take similar action. The company also incurs legal costs in defending its trademarks and cannot assure success in those matters.
- On July 21, 2014, the board declared a $0.17 per-share dividend, payable August 15, 2014. On July 25, 2014, it approved approximately 81,000 restricted shares for employees and outside directors.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2014, with no significant changes in internal controls reported.
Most Important Facts for Investors to Verify
- Whether the decline in new customers and new-order sales persists as advertising spending is reduced.
- Whether gross-margin improvement from lower product costs is sustainable amid competition and price sensitivity.
- The effect of seasonal demand for heartworm, flea, and tick products on subsequent quarters.
- Cash deployment among dividends, the remaining share repurchase authorization, capital expenditures, and operating needs.
- Potential regulatory or trademark-related proceedings, including any future state pharmacy-board actions.
- The filing’s caution that quarterly results are not necessarily indicative of full-year fiscal 2015 performance.