PetMed Express, Inc. Form 10-Q Summary
Business Context and Reporting Period
PetMed Express, Inc., doing business as 1-800-PetMeds, markets prescription and non-prescription pet medications and health products directly to U.S. consumers. The filing covers the three months ended June 30, 2011, the first quarter of fiscal 2012; fiscal years end March 31. The financial statements are unaudited.
- Approximately 73.5% of sales were generated through the Internet, versus 70.3% in the prior-year quarter.
- The Company acquired approximately 226,000 new customers, versus approximately 220,000.
- Sales were seasonal, particularly for heartworm and flea and tick products.
Financial Performance and Position
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Sales | $73.6 million | $74.4 million | Down 1.1% |
| Gross profit | $24.1 million | $27.2 million | Down 11.4% |
| Gross margin | 32.8% | 36.6% | Down 3.8 percentage points |
| Income from operations | $7.6 million | $11.8 million | Down 36.0% |
| Operating margin | 10.3% | 15.9% | Down 5.6 percentage points |
| Net income | $4.8 million | $7.2 million | Down 33.0% |
| Diluted earnings per share | $0.22 | $0.32 | Down $0.10 |
| Operating cash flow | $8.5 million | $26.5 million | Down $17.9 million |
- Advertising expense increased 14.3% to $10.1 million, or 13.7% of sales, from 11.9% of sales. Customer acquisition cost increased to $45 from $40.
- Cost of sales increased 4.9% to $49.5 million, or 67.2% of sales, from 63.4%, reflecting higher product costs and more aggressive pricing.
- General and administrative expense declined 1.7% to $6.1 million. Stock-based compensation was $565,000.
- The effective tax rate was 36.8%, compared with 39.3%. The prior-year rate included a one-time tax charge of approximately $280,000 related to reconciling a net operating loss carryforward.
- At June 30, 2011, cash and cash equivalents were $49.4 million, short-term investments were $10.2 million, and long-term investments were $4.8 million.
- Total assets were $99.4 million and total liabilities were $13.3 million. The Company reported no debt obligations.
- Working capital was $77.7 million, compared with $80.6 million at March 31, 2011.
- The Company paid $2.8 million in dividends and repurchased approximately 1.1 million shares for $13.6 million during the quarter. The quarterly dividend was increased to $0.125 per share from $0.10.
Cash Flow and Investments
- Operating cash flow declined primarily because inventory increased by $934,000 in the current quarter, whereas inventory declined by $13.3 million in the prior-year quarter.
- Investing activities provided $7.5 million, principally because the Company liquidated approximately $7.7 million of auction rate securities at par.
- Financing activities used $16.3 million, principally for share repurchases and dividends. Cash decreased by $247,000 to $49.4 million during the quarter.
- The Company held $4.8 million of auction rate securities classified as long-term investments. These securities remained illiquid and were valued using Level 3 inputs. Cumulative temporary impairment was $64,000 at June 30, 2011.
- Approximately $400,000 of capital expenditures was forecast for the remainder of fiscal 2012, expected to be funded from operating cash flow.
Material Changes, Outlook, and Risks
- Sales declined modestly because lower reorder sales more than offset higher new-order sales. Management attributed lower average order size to aggressive flea and tick pricing and increased competition.
- Management expects advertising to represent approximately 13% of fiscal 2012 sales and estimates an effective tax rate of approximately 37.0%, although actual quarterly results may vary.
- Management cautioned that competition, price-sensitive consumers, trading down to generics, higher product costs, and increased advertising costs could pressure sales and margins.
- The Company expects to use cash for operations, dividends, and additional share repurchases. A fourth repurchase program authorizing up to $20.0 million was approved on August 1, 2011.
- In July 2011, the Company repurchased approximately 342,000 additional shares for $3.8 million. The Board also approved approximately 91,000 restricted shares and declared a $0.125 per-share dividend payable August 26, 2011.
- The Company disclosed a patent-infringement lawsuit involving electronic catalog systems. A former Internet-software vendor ceased indemnification effective February 15, 2011; management stated that the outcome and potential loss could not be estimated.
- Failed auction markets could delay liquidation of the remaining auction rate securities and could require additional impairment if credit ratings deteriorate or liquidity does not improve.
- Management stated that disclosure controls were effective, there were no material changes in internal control over financial reporting, and there were no off-balance-sheet arrangements.
Investor Verification Items
- Verify whether the aggressive pricing and advertising strategy can restore sales growth without further erosion of gross margin.
- Monitor reorder trends, average order size, new-customer acquisition cost, and Internet versus contact-center sales.
- Assess operating cash-flow conversion after inventory purchases and continued share repurchases and dividends.
- Confirm the liquidity, valuation assumptions, and potential impairment exposure related to the remaining auction rate securities.
- Review developments, indemnification status, and potential exposure in the patent litigation and any future pharmacy-board actions.
- Confirm execution of the new share-repurchase authorization and the effect of repurchases on shares outstanding and per-share results.