Business Context and Reporting Period
PetMed Express, Inc., doing business as 1-800-PetMeds, is a nationwide direct-to-consumer pet pharmacy selling prescription and non-prescription medications, health products, and supplies. The filing covers the three months ended June 30, 2021, the first quarter of fiscal 2022, compared with the three months ended June 30, 2020. Substantially all sales are in the United States and approximately 84% of quarterly sales were generated through the Internet.
Key Financial Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Sales | $79.3 million | $96.2 million | Down 17.6% |
| Gross profit | $21.8 million | $26.8 million | Down 18.7% |
| Gross margin | 27.5% | 27.8% | Down 0.3 percentage points |
| Income from operations | $5.4 million | $9.4 million | Down 42.6% |
| Operating margin | 6.8% | 9.8% | Down 3.0 percentage points |
| Net income | $4.4 million | $7.8 million | Down 43.0% |
| Diluted EPS | $0.22 | $0.39 | Down $0.17 |
| Net cash used in operating activities | $0.4 million | $11.2 million | Improved by $10.8 million |
| Capital expenditures | $0.5 million | $0.1 million | Increased by $0.3 million |
| Cash dividends paid | $6.0 million | $5.6 million | Increased by $0.4 million |
Cost of sales was $57.5 million, or 72.5% of sales, compared with 72.2% in the prior-year quarter. Advertising expense was $7.7 million, or 9.7% of sales, compared with 9.4%. General and administrative expense was $8.0 million, or 10.2% of sales, compared with 8.1%. The effective tax rate was approximately 23.5%, compared with 20.6%.
Cash and cash equivalents were $111.8 million at June 30, 2021, compared with $118.7 million at March 31, 2021. Working capital was $115.3 million, and total liabilities were $33.0 million. The company reported no debt obligations, no material lease commitments, and no off-balance-sheet arrangements.
Material Changes Versus the Prior Comparable Period
- Reorder sales declined 11.8% to $70.9 million, while new-order sales declined 46.9% to $8.4 million.
- Internet sales declined 18.5% to $66.4 million; contact-center sales declined 12.4% to $12.9 million.
- New-customer acquisitions fell to approximately 92,000 from approximately 186,000. The advertising cost per acquired customer increased to $83 from $48.
- Management attributed the sales decline to a more competitive market, increased advertising costs, a crowded advertising environment, and the recovery of veterinary visits as pandemic-related restrictions eased.
- Gross margin declined modestly because major manufacturers shifted rebate funding from product-cost discounts to cooperative marketing rebates.
- General and administrative expense included a $717,000 charge related to the CEO separation agreement and $260,000 of brand and marketing professional fees, including a related-party engagement with Prophet.
- Cash flow from operations was negative $422,000, principally reflecting reduced earnings and a $14.8 million decrease in accounts payable, partially offset by a $5.2 million reduction in inventory.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management estimated a fiscal 2022 effective tax rate of approximately 23.5%.
- The company forecast approximately $1.5 million of capital expenditures for the remainder of fiscal 2022, primarily for its e-commerce platform, funded from operating cash flow.
- Management expects competition, consumer price sensitivity, advertising-market conditions, and seasonality in flea, tick, and heartworm products to affect future sales. The filing provides no revenue or earnings forecast.
- COVID-19 caused no material operational disruption during the quarter, although the company experienced delays in delivery of some inventory items and continues to identify supply-chain and employee-availability risks.
- Menderes Akdag’s employment agreement ended July 30, 2021. Bruce S. Rosenbloom was appointed interim Chief Executive Officer and President, in addition to serving as Chief Financial Officer, effective upon Mr. Akdag’s departure. He is to receive an additional $10,000 monthly stipend during the interim period.
- The board declared a $0.30-per-share dividend on July 26, 2021, with an estimated aggregate payable of approximately $6.1 million.
- Approximately $28.7 million remained available under the share repurchase plan at June 30, 2021; no repurchases occurred during the quarter.
- State pharmacy-board complaints had been settled in the past. The company also pursues trademark litigation, and management cannot assure favorable outcomes or that additional state actions will not occur.
- The company adopted ASU 2019-12 on April 1, 2021, with no material impact. A separate financial-instruments standard is scheduled for adoption on April 1, 2022 and is not expected to have a material impact.
Important Facts for Investors to Verify
- Whether the sharp decline in new-customer acquisition and advertising efficiency is temporary or signals a sustained deterioration in customer economics.
- Whether sales and reorder trends recover as post-pandemic veterinary visits and retail activity normalize.
- The effect of manufacturer rebate changes on gross margin and future cooperative marketing income.
- The company’s ability to fund dividends, planned e-commerce capital expenditures, and any share repurchases from operating cash flow.
- The duration and cost of the interim CEO arrangement and the timing of appointing a permanent successor.
- Potential impacts from pharmacy-board matters, trademark litigation, supply-chain delays, and other risks referenced in the fiscal 2021 Form 10-K.
- The filing states that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.