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 for dogs and cats. The company markets approximately 3,000 products primarily through its website, contact center, and national advertising.
The filing covers the three and nine months ended December 31, 2016, representing the third quarter and first nine months of fiscal 2017. The financial statements are unaudited. The company relocated its headquarters and distribution facility to a newly acquired property in Delray Beach, Florida, during December 2016.
Financial Performance and Position
| Metric | Three Months Ended December 31, 2016 | Prior Year | Nine Months Ended December 31, 2016 | Prior Year |
|---|---|---|---|---|
| Sales | $52.9 million | $50.9 million | $186.1 million | $179.3 million |
| Gross profit | $16.6 million | $16.8 million | $57.2 million | $58.6 million |
| Income from operations | $7.7 million | $7.6 million | $25.8 million | $23.8 million |
| Net income | $4.8 million | $4.9 million | $16.3 million | $15.1 million |
| Diluted earnings per share | $0.24 | $0.24 | $0.80 | $0.75 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $31.6 million | $22.6 million |
Third-quarter gross margin was 31.5%, compared with 32.9% in the prior-year quarter. Nine-month gross margin was 30.7%, compared with 32.7%. Third-quarter operating margin was 14.5%, compared with 15.0%, while nine-month operating margin improved to 13.8% from 13.3%. Net margin was 9.1% for the quarter and 8.8% for the nine-month period, compared with 9.6% and 8.5%, respectively.
- Cash and cash equivalents were $47.9 million at December 31, 2016, compared with $37.6 million at March 31, 2016.
- Total assets were $97.6 million, compared with $90.3 million at March 31, 2016.
- Working capital was approximately $59.8 million, compared with $60.5 million at March 31, 2016.
- The company had no debt obligations and no off-balance-sheet arrangements.
- Property and equipment increased to $29.1 million from $20.9 million, principally reflecting the new headquarters and distribution facility.
- Dividends paid during the nine months were $11.6 million. Dividends declared per common share increased to $0.19 from $0.18 in the comparable quarter.
Material Changes Versus the Prior Comparable Period
- Sales increased 3.8% in both the quarter and nine-month period, driven by higher new-order and reorder sales.
- New customers acquired increased to approximately 99,000 from 98,000 in the quarter and to approximately 388,000 from 374,000 for the nine-month period.
- Internet sales represented 82.8% of quarterly sales, up from 81.4%; contact-center sales declined 4.0%.
- Cost of sales grew faster than sales, increasing 6.0% for the quarter and 6.9% for the nine-month period. Management attributed the margin pressure to higher product costs on certain brands and additional customer discounts.
- Advertising expense declined 21% in the quarter and 27% for the nine-month period, primarily because television advertising was eliminated. Customer acquisition cost declined to $32 from $41 in the quarter and to $34 from $49 for the nine-month period.
- General and administrative expense increased 7.7% in the quarter and 6.4% for the nine-month period, mainly due to higher payroll and stock-based compensation, headquarters-related costs, bank fees, and bad-debt expense.
- Depreciation increased to $457,000 from $167,000 in the quarter, reflecting property and equipment placed in service at the new facility.
- Operating cash flow increased by approximately $9.0 million for the nine-month period, primarily because of a larger reduction in inventory.
- Investing cash outflows increased substantially to $9.9 million from $227,000, primarily for property and equipment additions.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management anticipated advertising expense of approximately 7.0% of fiscal 2017 sales, subject to seasonality and advertising availability.
- Management estimated a fiscal 2017 effective tax rate of approximately 37.5%.
- Approximately $1.2 million of additional capital expenditures were forecast for the remainder of fiscal 2017, expected to be funded from operating cash flow.
- The company stated that future sales may be adversely affected by increased competition and greater consumer price sensitivity. Sales are also seasonal, particularly because of heartworm, flea, and tick medications.
- A one-time $96,000 charge related to an under-accrual of fiscal 2016 income taxes was recorded in the December 2016 quarter.
- The company had approximately $10.2 million remaining under its share repurchase plan as of December 31, 2016, although no issuer purchases were reported during the quarter.
- On January 23, 2017, the board declared a $0.19-per-share quarterly dividend, estimated at approximately $3.9 million, payable February 17, 2017.
- Pending or future regulatory actions by state boards and litigation involving protection of trade and service marks remain potential contingencies. The filing reports no legal proceedings for the period.
- The majority of cash equivalents was invested in money market funds. Interest-rate and credit risks could affect investment income and investment values, although the company held no derivative instruments.
- Management reported that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether sales growth can continue despite competition, price pressure, seasonality, and lower gross margins.
- Whether the elimination of television advertising sustains customer acquisition and repeat-order growth.
- The operating and depreciation impact of the new headquarters and distribution facility, including the remaining capital spending program.
- The company’s future use of cash for dividends, share repurchases, capital expenditures, and operating needs.
- The sustainability of strong operating cash flow after inventory-related working-capital benefits.
- Potential regulatory or trademark litigation exposure and the effect of any future settlements.
- The timing and impact of the pending accounting guidance concerning employee share-based payment transactions.