PetMed Express, Inc. — FY2015 Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2015. The filing includes fourth-quarter results for the quarter ended March 31, 2015. PetMed Express operates the 1-800-PetMeds nationwide pet pharmacy, selling prescription and non-prescription medications, health products, and supplies directly to consumers.
Business Context and Reporting Period
- Products are marketed through Internet, telephone contact-center, television, online, and direct-mail channels.
- Approximately 80% of fiscal 2015 sales were generated through the Internet; approximately 50% of sales consisted of non-prescription products and supplies, with the balance primarily prescription medications.
- The Company offered approximately 3,000 SKUs and served approximately 2.5 million customers that had purchased within the prior two years.
- Approximately 529,000 new customers were acquired in fiscal 2015 versus 597,000 in fiscal 2014.
Financial Performance and Position
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Sales | $229.4 million | $233.4 million | Down 1.7% |
| Gross profit | $76.3 million | $77.6 million | Down 1.7% |
| Gross margin | 33.2% | 33.3% | Down 0.1 percentage point |
| Operating income | $27.6 million | $28.2 million | Down 2.1% |
| Operating margin | 12.0% | 12.1% | Down 0.1 percentage point |
| Net income | $17.5 million | $18.0 million | Down 2.9% |
| Net margin | 7.6% | 7.7% | Down 0.1 percentage point |
| Diluted EPS | $0.87 | $0.90 | Down $0.03 |
| Cash flow from operations | $32.0 million | $13.5 million | Increase of $18.5 million |
- Advertising expense declined to $25.2 million from $27.2 million, or 11.0% of sales versus 11.6%.
- General and administrative expense declined 1.2% to $21.1 million.
- Fourth-quarter fiscal 2015 sales were $50.0 million, gross profit was $16.9 million, operating income was $7.8 million, and net income was $5.0 million, compared with fourth-quarter fiscal 2014 sales of $48.6 million and net income of $4.5 million.
- At March 31, 2015, cash and cash equivalents were $35.6 million and short-term investments were $15.6 million. The Company had no debt obligations.
- Total assets were $82.9 million, total liabilities were $7.4 million, and shareholders’ equity was $75.4 million.
- Working capital was approximately $73.0 million, up from $66.1 million at March 31, 2014.
Material Changes Versus the Prior Comparable Period
- Sales declined primarily because of weaker new-order and reorder activity, particularly reduced demand for flea-and-tick topical medications.
- New-order sales declined 5.9% to $39.7 million, while reorder sales declined 0.8% to $189.7 million.
- Contact-center sales declined 7.6% to $45.3 million, while Internet sales were broadly stable at $184.1 million.
- Cost of sales declined with revenue, but increased slightly as a percentage of sales to 66.8% from 66.7%, reflecting higher product costs.
- A discontinued information-technology project generated a one-time expense of $1.7 million in the September 2014 quarter. The after-tax impact was approximately $1.1 million, or $0.05 diluted EPS. Management does not expect additional expenditures related to the project.
- Operating cash flow benefited significantly from a $10.7 million reduction in finished-goods inventory, compared with a $4.1 million inventory increase in fiscal 2014.
- Dividends declared increased to $0.68 per common share from $0.66. No shares were repurchased during fiscal 2015, and approximately $10.2 million remained available under the repurchase plan at year-end.
Liquidity, Capital Allocation, and Commitments
- Net cash used in investing activities was $1.0 million, including $918,000 of property and equipment purchases.
- Net cash used in financing activities was $13.7 million, primarily reflecting $13.8 million of dividends paid.
- Management forecast approximately $1.0 million of fiscal 2016 capital expenditures, funded from operating cash flow, and stated that no alternative financing was currently needed or planned.
- The Company had a non-cancelable facility lease with approximately $1.3 million of remaining minimum payments: $781,000 in fiscal 2016 and $519,000 in fiscal 2017.
- An increased quarterly dividend of $0.18 per share was declared on May 4, 2015 and paid on May 22, 2015; future dividends remain discretionary.
Guidance, Outlook, Risks, and Unusual Items
- Management anticipated advertising expense of approximately 11% of sales and an effective tax rate of approximately 37% for fiscal 2016.
- Sales are seasonal, particularly for heartworm and flea-and-tick medications. Fiscal 2015 quarterly sales represented approximately 32%, 25%, 21%, and 22% of annual sales, respectively.
- Management cautioned that increased competition and greater consumer price sensitivity could adversely affect future sales and margins.
- Prescription dispensing is subject to extensive state and federal regulation. Loss, suspension, or non-renewal of pharmacy licenses could materially impair operations.
- The Company relies partly on third-party distributors and has no guaranteed supply or pricing arrangements. Four suppliers represented approximately 50% of purchases in fiscal 2015.
- Approximately 50% of sales were generated from customers in eight states, creating geographic and licensing concentration.
- Operations, fulfillment, and customer-service activities are concentrated in one South Florida location, exposing the Company to hurricanes, facility damage, power failures, and other business interruptions.
- Key risks also include competition from veterinarians and retailers, veterinarian resistance to authorizing prescriptions, inventory management, information-system failures or security breaches, website-related liability, and intellectual-property disputes.
- The Company disclosed routine litigation and administrative complaints, including historical pharmacy-board complaints, but management did not believe their resolution would materially affect financial condition or results of operations.
- Independent auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditors concluded that internal controls were effective as of March 31, 2015.
Most Important Facts to Verify
- Whether weaker flea-and-tick demand, lower customer acquisition, and pricing competition persist into fiscal 2016.
- Whether the large fiscal 2015 operating cash-flow increase is sustained after the inventory reduction benefit.
- Gross-margin trends and the Company’s ability to offset supplier cost increases without reducing demand.
- Progress in securing direct manufacturer relationships and reducing reliance on secondary distributors.
- Continuity of pharmacy licenses, prescription authorization practices, and any new state regulatory actions.
- Execution of the current software-platform upgrade following the discontinued project.
- Future dividend declarations and any use of the remaining $10.2 million share-repurchase authorization.
- Exposure to the single-location operating model, cybersecurity events, and supplier concentration.