PetMed Express, Inc. — Form 10-Q Summary
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, 2020, the first quarter of fiscal 2021. The company reported that approximately 85% of sales were generated through the Internet and that operations continued without material disruption during the COVID-19 pandemic.
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Sales | $96.2 million | $80.0 million | Up 20.3% |
| Gross profit | $26.8 million | $21.9 million | Up 22.5% |
| Gross margin | 27.8% | 27.3% | Up 0.5 percentage points |
| Income from operations | $9.4 million | $6.2 million | Up 53.2% |
| Operating margin | 9.8% | 7.7% | Up 2.1 percentage points |
| Net income | $7.8 million | $5.3 million | Up 45.4% |
| Net margin | 8.1% | 6.7% | Up 1.4 percentage points |
| Diluted earnings per share | $0.39 | $0.26 | Up $0.13 |
| Cash flow from operating activities | $(11.2) million | $0.04 million | Declined |
- Reorder sales increased 18.7% to $80.4 million, while new order sales increased 28.9% to $15.8 million.
- Internet sales increased 21.6% to $81.5 million; contact-center sales increased 13.3% to $14.7 million.
- The company acquired approximately 186,000 new customers, compared with approximately 140,000 in the prior-year quarter.
- Average purchase size increased to approximately $89 from $86.
- Cash and cash equivalents were $86.8 million at June 30, 2020, compared with $103.8 million at March 31, 2020.
- Working capital was $106.7 million, compared with $104.7 million at March 31, 2020.
- The company had no debt obligations and no material outstanding lease commitments.
- Inventory increased to $43.1 million from $17.9 million at March 31, 2020, primarily as a precautionary response to potential supply-chain disruption.
- Dividends paid were $5.6 million; the company declared $0.28 per common share in dividends for the quarter.
Material changes versus the prior comparable period
- Sales growth reflected higher reorder and new-order activity, including increased online demand during COVID-19.
- Gross margin improved modestly as cost of sales declined to 72.2% of sales from 72.7%.
- General and administrative expense increased 19% to $7.8 million, including higher payroll, stock compensation, bank-service fees, telephone costs, and approximately $240,000 of COVID-19-related costs.
- Advertising expense increased 4.7% to $9.0 million but declined to 9.4% of sales from 10.8%. Advertising cost per newly acquired customer improved to $48 from $62.
- Other income declined to $345,000 from $824,000, primarily because of lower interest rates and reduced interest income.
- The effective tax rate decreased to approximately 20.6% from 23.5%, partly because of a one-time $285,000 state income-tax refund.
- Operating cash flow turned negative because the company temporarily increased inventory by $25.2 million, despite higher net income and increases in accounts payable and income taxes payable.
- Unlike the prior-year quarter, the company did not repurchase shares. Approximately $28.7 million remained available under the repurchase authorization at June 30, 2020.
Guidance, outlook, risks, contingencies, and unusual items
- Management anticipated advertising expense of approximately 9.0% of sales for fiscal 2021, subject to seasonality and advertising availability.
- Management estimated an effective tax rate of approximately 23.5% for fiscal 2021.
- Approximately $1.5 million of capital expenditures was forecast for the remainder of fiscal 2021, primarily for the e-commerce platform, funded from operating cash flows.
- Management stated that COVID-19 increased e-commerce demand and that the company had not experienced material supply-chain disruption; however, the pandemic could adversely affect operations, employee availability, financial performance, liquidity, and cash flow for an unknown period.
- Management identified increased competition, price sensitivity, advertising-market conditions, and seasonality in flea, tick, and heartworm products as risks to future sales and margins.
- The company’s cash is primarily invested in money-market funds and is exposed mainly to interest-rate and credit risk. The filing states that no derivatives were held.
- State pharmacy-board complaints had been settled in the past, but similar actions could arise in the future. The company also faces risks related to protecting its trade and service marks.
- On July 20, 2020, the board declared a $0.28-per-share dividend, estimated at approximately $5.6 million, payable August 7, 2020.
- Effective July 31, 2020, the CEO’s salary increased from $607,880 to $626,860, and he received 37,800 restricted shares. Additional restricted shares were approved for employees and independent directors.
- The company adopted the credit-loss standard ASU 2016-13 effective April 1, 2020; adoption did not materially affect the financial statements. ASU 2019-12 is scheduled for adoption on April 1, 2021.
- Management reported effective disclosure controls, no material changes to internal control over financial reporting, no legal proceedings requiring disclosure, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the COVID-19-related increase in online demand, new customers, and reorder activity persists after pandemic-related purchasing shifts normalize.
- Whether the elevated $43.1 million inventory balance converts to sales without material markdowns, obsolescence, or working-capital pressure.
- The sustainability of the 27.8% gross margin and improved advertising efficiency amid competition and price sensitivity.
- The effect of negative operating cash flow and continued dividends or share repurchases on the $86.8 million cash balance.
- Whether the company’s projected 9.0% advertising ratio, 23.5% tax rate, and $1.5 million remaining fiscal-year capital-expenditure estimate are achieved.
- Future pharmacy-board, trademark, supply-chain, interest-rate, and COVID-19 developments, including any effect on liquidity or operating continuity.