PetMed Express, Inc. Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2019, including the fourth quarter ended March 31, 2019. The filing was dated May 28, 2019. The company operates the 1-800-PetMeds nationwide online and telephone pet pharmacy, selling prescription and non-prescription medications, health products, and supplies primarily for dogs and cats.
Financial Performance and Position
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Sales | $283.4 million | $273.8 million | +3.5% |
| Gross profit | $95.3 million | $97.8 million | -2.6% |
| Gross margin | 33.6% | 35.7% | -210 basis points |
| Operating income | $46.2 million | $52.1 million | -11.4% |
| Operating margin | 16.3% | 19.0% | -270 basis points |
| Net income | $37.7 million | $37.3 million | +1.2% |
| Diluted EPS | $1.84 | $1.82 | +1.1% |
| Operating cash flow | $45.1 million | $37.4 million | +20.8% |
- Fourth quarter: Sales were $64.6 million, gross profit was $20.7 million, operating income was $7.8 million, net income was $6.6 million, and diluted EPS was $0.32. Fourth-quarter sales represented approximately 23% of fiscal-year sales.
- Revenue mix: Reorder sales increased 6.3% to $241.8 million and represented 85.3% of sales; new-order sales declined 10.0% to $41.6 million. Internet sales increased 4.2% to $240.0 million, or 84.7% of total sales.
- Margins and expenses: Cost of sales increased 6.9%, driven by higher product costs and customer discounts used to respond to online competition. Advertising expense increased approximately $2.8 million to $22.1 million, and customer acquisition cost increased to $47 from $37.
- Taxes and other income: Interest and other income increased to $2.9 million from $1.7 million. The effective tax rate declined to 23.2% from 30.7%, principally reflecting the Tax Cuts and Jobs Act.
- Liquidity: Cash and cash equivalents were $100.5 million at March 31, 2019, compared with $77.9 million at March 31, 2018. Working capital was $107.8 million versus $87.1 million.
- Debt: The company reported no debt obligations and no off-balance-sheet arrangements at year-end.
- Capital allocation: Fiscal 2019 dividends paid were $21.9 million, or $1.06 per common share declared. The company had approximately $40.2 million remaining under its repurchase authorization and made no repurchases during fiscal 2019.
Material Changes Versus the Prior Comparable Period
- Sales growth slowed materially from 9.9% in fiscal 2018 to 3.5% in fiscal 2019, as new-customer acquisitions declined to approximately 467,000 from 521,000.
- Reorder revenue continued to grow, but new-order revenue declined, increasing the company’s reliance on its existing customer base.
- Gross margin contracted from 35.7% to 33.6%, primarily because of increased discounts and product costs.
- Operating income declined despite higher sales, as gross profit decreased and advertising spending increased.
- Net income and diluted EPS increased slightly because the lower effective tax rate and higher other income substantially offset weaker operating performance.
- Operating cash flow improved by $7.8 million, aided in part by a $2.0 million reduction in inventory.
- The company expects approximately $5.0 million of fiscal 2020 capital expenditures, funded from operating cash flow.
Guidance, Outlook, Risks, and Unusual Items
- Management anticipated advertising expense of approximately 10% of sales in fiscal 2020 and an effective tax rate of approximately 24.0%. No formal sales or earnings guidance was provided.
- Management identified increasing online competition and greater consumer price sensitivity as pressures on sales, discounts, and gross margins.
- The company relies on secondary distributors for a portion of its prescription and non-prescription products. Four suppliers accounted for approximately 50% of purchases in fiscal 2019, creating supply and pricing concentration risk.
- Prescription sales depend on maintaining pharmacy licenses across the states, regulatory compliance, and veterinarian authorization of prescriptions. Past pharmacy-board complaints have been settled, and future regulatory actions remain possible.
- Approximately 50% of sales came from customers in eight states, increasing the potential impact of losing a license in one of those states.
- Operations, pharmacy activities, fulfillment, and distribution are concentrated at one South Florida facility, creating hurricane, disaster, and business-interruption exposure.
- The company disclosed two putative class-action lawsuits alleging that its website does not comply with disability-accessibility laws. The company denies wrongdoing; the potential outcomes and losses could not be estimated.
- Subsequent to year-end, the company repurchased approximately 450,000 shares for $8.6 million, or approximately $19.08 per share, and paid a $0.27 quarterly dividend totaling approximately $5.6 million.
- The CEO’s employment agreement was extended through the earlier of the 2020 annual meeting or August 1, 2020, with a $600,000 annual salary, potential restricted-stock awards, and change-in-control severance provisions.
- RSM US LLP issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Important Facts for Investors to Verify
- Whether reorder growth can offset declining new-customer acquisition and new-order sales.
- Whether discounting and product-cost inflation continue to reduce gross margin.
- Fiscal 2020 advertising spending as a percentage of sales and its effect on customer acquisition economics.
- Supplier concentration, product availability, and the company’s progress in establishing direct manufacturer relationships.
- Status and potential exposure from the two website accessibility lawsuits and any future pharmacy-board proceedings.
- Sustainability of quarterly dividends and share repurchases relative to operating cash flow and planned capital expenditures.
- Seasonality and quarterly volatility, particularly in flea, tick, and heartworm medication sales.
- Cash concentration in money-market accounts, including exposure to interest-rate changes and amounts exceeding federal deposit-insurance limits.