PetMed Express, Inc. 10-Q Summary
Business context and reporting period
PetMed Express, Inc., operating as 1-800-PetMeds, markets prescription and non-prescription pet medications, health products, and supplies directly to consumers, primarily in the United States. This quarterly report covers the three and six months ended September 30, 2013, the second quarter and first six months of fiscal 2014. The financial statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Sales | $60.5 million, up 4.0% | $134.7 million, up 6.0% |
| Gross profit | $19.3 million, down 0.6% | $43.3 million, up 3.8% |
| Gross margin | 31.8%, versus 33.3% | 32.1%, versus 32.8% |
| Income from operations | $6.5 million, versus $6.3 million | $14.0 million, versus $12.5 million |
| Net income | $4.2 million, versus $4.0 million | $8.9 million, versus $8.0 million |
| Diluted EPS | $0.21, versus $0.20 | $0.44, versus $0.40 |
| Net cash from operating activities | Not separately provided | $24.4 million, versus $15.7 million |
Cost of sales increased to 68.2% of sales in the quarter and 67.9% for the six-month period, compared with 66.7% and 67.2%, respectively, in the prior-year periods. Operating margin was 10.8% for the quarter and 10.4% for the six months, compared with 10.9% and 9.9% previously.
At September 30, 2013, cash and cash equivalents were $35.9 million, short-term investments were $15.5 million, and working capital was $64.8 million. Total liabilities were $10.7 million, and the company reported no debt obligations. The company paid $6.5 million in dividends during the six months and had approximately $10.2 million remaining under its share repurchase plan.
Cash increased by $17.8 million during the six months to $35.9 million. Investing activities used $72,000, primarily for capital expenditures. Financing activities used $6.5 million, consisting primarily of dividends. Approximately $2.0 million of capital expenditures was forecast for the remainder of fiscal 2014, to be funded from operating cash flow.
Material changes versus the prior comparable period
- Sales growth was driven primarily by increased reorder sales and higher average order values. Average purchase size increased to approximately $73 for the quarter and $75 for the six-month period, compared with $72 and $73, respectively.
- Reorder sales increased 5.3% in the quarter and 6.3% for the six months. New-order sales decreased 1.1% in the quarter but increased 4.7% for the six months.
- Internet sales increased 7.3% in the quarter and 9.1% for the six months; Internet sales represented approximately 79% of quarterly sales versus 77% in the prior year.
- Gross margin declined because of higher product costs and increased promotional discounts.
- Quarterly advertising expense decreased 5.9%, while six-month advertising expense increased 0.6%. Advertising cost per acquired customer was $41 for the quarter and $46 for the six months.
- Operating cash flow increased substantially, primarily because of a larger inventory reduction, higher accounts payable, and increased net income.
- No shares were repurchased during the six months ended September 30, 2013, compared with approximately 397,000 shares repurchased for $3.9 million in the prior-year period.
- Novartis resumed distribution of some animal-health brands during the quarter, potentially improving product availability compared with the prior fiscal year.
Guidance, outlook, risks, and unusual items
- Management anticipated advertising expense of approximately 12% to 13% of fiscal 2014 sales and an effective tax rate of approximately 37.0%.
- Management stated that future sales could be adversely affected by increased competition and greater consumer price sensitivity. Sales are seasonal, particularly for heartworm and flea-and-tick products.
- Product costs, promotional discounts, advertising availability, and the effectiveness of marketing campaigns may affect future margins and customer acquisition.
- The company had previously settled complaints filed with various state regulatory boards and stated that other states could take similar action. The company also initiates litigation to protect its trademarks, with no assurance of success.
- The board declared a $0.17-per-share quarterly dividend on October 25, 2013, payable November 22, 2013, with an estimated total dividend of approximately $3.4 million.
- The company reported no off-balance-sheet arrangements, no legal proceedings reported under Item 1, and no significant changes affecting the effectiveness of internal controls.
Important facts for investors to verify
- Whether sales growth can continue while gross margin remains pressured by product costs and promotional discounts.
- The sustainability and quality of the $24.4 million six-month operating cash flow, including the effect of inventory reductions and increased accounts payable.
- Future customer acquisition trends, reorder rates, Internet-channel growth, and advertising efficiency.
- Use of the remaining $10.2 million share repurchase authorization and the company’s ability to maintain dividend payments while funding planned capital expenditures.
- Exposure to seasonal demand, competitive pricing, supplier disruptions, state regulatory actions, and trademark litigation.
- The filing’s caution that interim results are not necessarily indicative of full-year fiscal 2014 results.