PetMed Express, Inc. Form 10-Q Summary
Business Context and Reporting Period
PetMed Express, Inc. operates the 1-800-PetMeds nationwide pet pharmacy, selling prescription and non-prescription medications, health products, and supplies primarily to U.S. consumers. The filing covers the quarter and nine months ended December 31, 2017, within fiscal 2018. Financial statements are unaudited and amounts are in thousands except per-share data.
- Approximately 84% of third-quarter sales were generated through the Internet, compared with 83% in the prior-year quarter.
- The average purchase increased to approximately $86 from $81 in the prior-year quarter.
- The Company acquired approximately 106,000 new customers in the quarter and 408,000 during the nine-month period.
Financial Performance and Liquidity
| Metric | Three Months Ended December 31 | Nine Months Ended December 31 |
|---|---|---|
| Sales | $60.1 million, up 13.7% | $206.5 million, up 10.9% |
| Gross profit | $21.9 million; 36.5% margin | $72.9 million; 35.3% margin |
| Income from operations | $11.5 million; 19.1% margin | $38.1 million; 18.5% margin |
| Net income | $9.1 million, up from $4.8 million | $27.1 million, up from $16.3 million |
| Diluted earnings per share | $0.44 | $1.33 |
| Operating cash flow | Not separately provided | $35.1 million, compared with $31.6 million |
- Cost of sales declined to 63.5% of sales in the quarter and 64.7% for the nine months, compared with 68.5% and 69.3%, respectively, in the prior-year periods. Management attributed the improvement primarily to a shift toward higher-margin products, partly offset by customer discounts.
- Advertising expense increased 30.2% in the quarter to $4.1 million and 12.3% for the nine months to $14.9 million. Customer acquisition cost increased to $39 per new customer in the quarter and $37 for the nine months.
- Cash and cash equivalents were $81.0 million at December 31, 2017, compared with $58.7 million at March 31, 2017. Most cash was invested in money market funds.
- Working capital was $80.7 million at December 31, 2017, compared with $63.4 million at March 31, 2017.
- The Company had no debt obligations, no outstanding lease commitments, and no off-balance-sheet arrangements.
- Nine-month investing cash outflows were $0.6 million, versus $9.9 million in the prior-year period. Financing cash outflows were $12.3 million, primarily dividends.
- Dividends declared were $0.20 per common share during the quarter and $0.60 per share for the nine-month period.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven by higher reorder and new-order sales. Third-quarter reorder sales increased 13.4%, while new-order sales increased 15.5%.
- Internet sales increased 15.0% in the quarter, while contact-center sales increased 7.2%.
- Gross margin expanded by 5.0 percentage points in the quarter and 4.6 percentage points for the nine months.
- General and administrative expense increased 8.5% in the quarter and 5.9% for the nine months, primarily due to higher payroll and stock-based compensation, bank fees, and professional fees.
- Depreciation increased due to the Company’s new headquarters and distribution facility placed into service in fiscal 2017.
- The effective tax rate declined to approximately 24.0% for the quarter and 31.1% for the nine months, compared with 38.3% and 37.5%, respectively, in the prior-year periods. The reduction primarily reflected the Tax Cuts and Jobs Act of 2017 and related deferred-tax adjustments.
- The Company recognized a one-time tax benefit of approximately $1.7 million, including a $384,000 reduction in deferred tax liabilities, and a $175,000 charge related to a fiscal 2017 tax provision true-up.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects advertising expense to be approximately 7.0% to 8.0% of sales for fiscal 2018, subject to quarterly seasonality and advertising availability.
- Management expects an effective tax rate of approximately 34.0% for the quarter ending March 31, 2018 and approximately 24.0% for fiscal 2019.
- Approximately $300,000 of capital expenditures was forecast for the remainder of fiscal 2018, funded from operating cash flow.
- Approximately $10.2 million remained under the share repurchase plan at December 31, 2017. No shares were repurchased during the reported periods.
- On January 22, 2018, the Board declared an increased quarterly dividend of $0.25 per share, estimated at approximately $5.2 million based on the January 30 share balance.
- Sales are seasonal, particularly because of heartworm, flea, and tick products. Management also cited competition, price sensitivity, advertising conditions, and customer acquisition costs as risks to future growth.
- A previously filed TCPA class-action lawsuit was voluntarily dismissed with prejudice in November 2017. A consolidated securities class-action lawsuit was voluntarily dismissed without prejudice on or about January 19, 2018. The filing states that the Company continues to face potential regulatory-board actions and trademark litigation risks.
- The Company stated that its disclosure controls and procedures were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Investor Verification Items
- Verify whether improved gross margins are sustainable amid increased discounts, competition, and price sensitivity.
- Assess the return on increased advertising spending and the rising cost of acquiring new customers.
- Review the sustainability of the lower effective tax rate and the effects of the Tax Cuts and Jobs Act on future periods.
- Evaluate cash allocation among dividends, the remaining share repurchase authorization, capital expenditures, and operating needs.
- Monitor seasonal sales patterns, inventory levels, and the impact of product mix on margins.
- Review ongoing regulatory, legal, trademark, and contingency disclosures in subsequent filings despite the reported lawsuit dismissals.