PetMed Express, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2014, within fiscal 2015. Results are unaudited. PetMed Express operates the 1-800-PetMeds nationwide pet pharmacy, selling prescription and non-prescription medications, health products, and supplies primarily to U.S. consumers through Internet, television, and direct-mail advertising.
Financial Highlights
| Metric | Three months ended September 30, 2014 | Three months ended September 30, 2013 | Six months ended September 30, 2014 | Six months ended September 30, 2013 |
|---|---|---|---|---|
| Sales | $57.6 million | $60.5 million | $130.1 million | $134.7 million |
| Gross profit | $18.5 million | $19.3 million | $42.2 million | $43.3 million |
| Gross margin | 32.1% | 31.8% | 32.5% | 32.1% |
| Operating income | $4.3 million | $6.5 million | $12.1 million | $14.0 million |
| Operating margin | 7.5% | 10.8% | 9.3% | 10.4% |
| Net income | $2.7 million | $4.2 million | $7.7 million | $8.9 million |
| Diluted EPS | $0.14 | $0.21 | $0.38 | $0.44 |
| Net cash from operations | Not provided for quarter | Not provided for quarter | $23.6 million | $24.4 million |
Margins and expenses: Cost of sales was 67.9% of sales in the quarter and 67.5% year to date, compared with 68.2% and 67.9%, respectively, in the prior-year periods. Advertising expense was $6.9 million in the quarter and $16.8 million year to date. The quarter included $1.7 million of discontinued project costs, equal to a $1.1 million after-tax impact or $0.05 of diluted EPS.
Liquidity and capital resources: At September 30, 2014, cash and cash equivalents were $34.6 million and short-term investments were $15.6 million, for total cash and investments of $50.2 million. Working capital was $69.6 million, compared with $66.1 million at March 31, 2014. The company had no debt obligations and no off-balance-sheet arrangements. Six-month investing cash use was $409,000, primarily for property and equipment. Six-month financing cash use was $6.9 million, primarily dividends.
Balance sheet: Total assets were $79.4 million at September 30, 2014, including $20.5 million of inventory. Total liabilities were $7.6 million and shareholders’ equity was $71.8 million. Inventory declined from $35.7 million at March 31, 2014, while cash increased from $18.3 million to $34.6 million.
Material Changes Versus Prior Comparable Period
- Quarterly sales declined 4.8% to $57.6 million; six-month sales declined 3.4% to $130.1 million. Management attributed the declines primarily to lower new and reorder sales and weaker demand for flea and tick topical medications.
- New customers declined to approximately 152,000 in the quarter from 169,000 and to approximately 336,000 year to date from 376,000.
- Internet sales represented approximately 80% of quarterly sales, compared with 79% in the prior year. The average purchase increased to approximately $75 per order from $73.
- Gross margin improved by 30 basis points in the quarter and 40 basis points year to date, primarily from lower product costs for certain brands and a shift toward higher-margin products.
- Operating margin declined because the gross-profit improvement was more than offset by lower sales, relatively stable advertising and general and administrative costs, and the $1.7 million discontinued software-project charge.
- Advertising cost per acquired customer increased to $45 from $41 in the quarter and to $50 from $46 year to date.
- The company paid $6.9 million of dividends during the first six months, compared with $6.5 million in the prior-year period. Dividends declared were $0.17 per common share in each quarter.
Guidance, Outlook, Risks, and Unusual Items
- Management anticipated advertising expense of approximately 12% of sales for fiscal 2015, subject to seasonality and advertising availability.
- Management estimated a fiscal 2015 effective tax rate of approximately 37%.
- Approximately $750,000 of capital expenditures was forecast for the remainder of fiscal 2015, expected to be funded from operating cash flow.
- The company had approximately $10.2 million remaining under its share repurchase authorization as of September 30, 2014, although no issuer purchases occurred during the quarter. Management may use cash for repurchases, dividends, or operations.
- The discontinued information-technology project generated a one-time $1.7 million charge in the quarter. Management stated that no additional expenditures are expected and that the company will continue upgrading its existing platform.
- Management cited increased competition, consumer price sensitivity, seasonal demand, and weakness in flea and tick products as risks to sales. Advertising conditions and customer-acquisition costs may also affect future results.
- The company has settled complaints previously filed with certain state regulatory boards and stated that other states could pursue similar actions. Litigation is also initiated to protect trademarks, with no assurance of success.
- A quarterly dividend of $0.17 per share was declared on October 20, 2014, with an estimated $3.4 million payable on November 14, 2014.
- ASU 2014-09, Revenue from Contracts with Customers, will be effective for the company’s fiscal year beginning April 1, 2017. The company was evaluating its potential impact.
Important Facts for Investors to Verify
- Whether sales and new-customer acquisition recover amid competition, price sensitivity, and seasonal medication demand.
- The sustainability of the improved gross margin and the effect of product mix and supplier pricing.
- Advertising efficiency, including customer-acquisition cost and the planned approximately 12% advertising-to-sales ratio.
- Whether the discontinued software project creates any further costs despite management’s statement that none are expected.
- Future uses of the company’s substantial cash and investment balances, including dividends, repurchases, operations, and capital expenditures.
- Potential state regulatory actions, trademark litigation, and other contingencies referenced in the filing.
- The impact of the future adoption of ASU 2014-09 on revenue recognition and reported results.