PetMed Express, Inc. — Form 10-Q Summary
Business Context and Reporting Period
PetMed Express, Inc. (PetMeds) is a nationwide direct-to-consumer pet pharmacy selling prescription and non-prescription medications, health products, and supplies primarily through its website and contact center. This filing covers the quarter and six months ended September 30, 2021, the second quarter and first six months of fiscal 2022. Prior-year comparisons are for the corresponding periods ended September 30, 2020.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | Six Months Ended September 30, 2021 | Six Months Ended September 30, 2020 |
|---|---|---|---|---|
| Sales | $67.4 million | $75.4 million | $146.7 million | $171.6 million |
| Gross profit | $19.2 million | $23.0 million | $41.0 million | $49.8 million |
| Gross margin | 28.5% | 30.5% | 27.9% | 29.0% |
| Operating income | $8.1 million | $10.5 million | $13.5 million | $19.9 million |
| Operating margin | 12.0% | 13.9% | 9.2% | 11.6% |
| Net income | $6.3 million | $8.4 million | $10.8 million | $16.2 million |
| Diluted EPS | $0.31 | $0.42 | $0.53 | $0.81 |
At September 30, 2021, cash and cash equivalents were $106.6 million, total current assets were $133.4 million, total current liabilities were $16.3 million, and working capital was approximately $117.2 million. The Company had no debt obligations and no material outstanding lease commitments.
Six-month operating cash flow was $1.1 million versus $15.2 million in the prior-year period. Capital expenditures were $1.0 million, dividends paid were $12.3 million, and ending cash declined by $12.2 million to $106.6 million. Virtually all cash and cash equivalents were invested in money market funds.
Material Changes Versus the Prior Comparable Period
- Quarterly sales declined 10.7%; six-month sales declined 14.5%.
- Quarterly reorder sales declined 8.5%, while new-order sales declined 30.0%. For the six-month period, reorder sales declined 10.3% and new-order sales declined 41.4%.
- New customers acquired decreased to approximately 65,000 in the quarter from 96,000 and to approximately 157,000 for the six months from 282,000.
- Gross margin decreased by 200 basis points for the quarter and 110 basis points for the six months. Management attributed part of the decline to manufacturers shifting rebate funding from product-cost discounts to cooperative marketing rebates.
- Advertising expense declined 33% for the quarter and 22% for the six months as management reduced spending amid a more expensive and competitive advertising market. Advertising cost per acquired customer was approximately $54 for the quarter and $71 for the six-month period.
- General and administrative expense increased 2.2% for the quarter and 3.0% for the six months, including higher professional fees and a higher state sales-tax accrual.
- Average order value increased to approximately $92 for the quarter and $93 for the six months, compared with $87 and $88, respectively, in the prior-year periods.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management expects results to remain exposed to competition, consumer price sensitivity, advertising-market costs, seasonality, manufacturer rebate practices, and the effectiveness of customer-acquisition spending. The Company stated that future sales may be adversely affected by increased competition and that future growth is not guaranteed.
- COVID-19 had not materially disrupted operations, although the Company experienced delays in delivery of some inventory items and continued workplace health measures.
- Sales are seasonal, particularly because of heartworm, flea, and tick medications.
- Management forecast approximately $1.0 million of capital expenditures for the remainder of fiscal 2022, primarily for the e-commerce platform, funded from operating cash flow.
- On August 30, 2021, Mathew N. Hulett became CEO and President under a three-year employment agreement with a $500,000 annual base salary and specified severance provisions.
- The Company granted Mr. Hulett 90,000 restricted shares and 510,000 performance restricted shares. The performance award was valued at $9.7 million and vests based on stock-price hurdles ranging from $40 to $60 and continued employment.
- Unrecognized restricted-stock compensation was $15.8 million at September 30, 2021, expected to be recognized over three years.
- On October 25, 2021, the Board declared a $0.30-per-share quarterly dividend, estimated at approximately $6.3 million, payable November 19, 2021.
- Approximately $28.7 million remained available under the share-repurchase plan, although no shares were repurchased during the six months.
- The Company disclosed routine risks involving pharmacy-board actions, trade- and service-mark litigation, supply-chain delays, advertising costs, inventory obsolescence, and credit-card chargebacks. No legal proceedings were reported in Part II, Item 1.
Important Facts for Investors to Verify
- Whether sales and new-customer acquisition recover after the significant fiscal 2022 declines.
- Whether gross-margin pressure from manufacturer rebate changes persists.
- The sustainability of dividends and potential share repurchases relative to operating cash flow, which was materially below the prior-year level.
- The financial and dilution effects of the CEO’s restricted-stock and performance-stock awards.
- Execution of the planned e-commerce capital investments and the effect on customer retention and acquisition.
- Potential effects of competition, advertising-market inflation, product availability, seasonal demand, and COVID-19-related supply delays.