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 primarily for dogs and cats. The filing covers the three months ended June 30, 2013, the first quarter of fiscal 2014. Financial statements are unaudited.
Financial Performance and Position
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Sales | $74.2 million | $69.0 million | +7.6% |
| Gross profit | $24.0 million | $22.3 million | +7.7% |
| Gross margin | 32.4% | 32.4% | Flat |
| Income from operations | $7.5 million | $6.2 million | +20.8% |
| Operating margin | 10.1% | 9.0% | +110 basis points |
| Net income | $4.8 million | $4.0 million | +20.3% |
| Net margin | 6.4% | 5.7% | +70 basis points |
| Diluted EPS | $0.24 | $0.20 | +$0.04 |
| Operating cash flow | $19.8 million | $13.8 million | +43.8% |
Sales growth reflected higher new-order and reorder sales, approximately 207,000 new customers versus 197,000 in the prior-year quarter, and an average order size of approximately $77 versus $73. Internet sales represented 78.7% of sales, compared with 76.6% previously. Reorder sales were $59.0 million and new-order sales were $15.2 million.
Advertising expense increased 5.5% to $10.4 million but declined to 14.0% of sales from 14.3%. General and administrative expense decreased 0.8% to $5.9 million, while depreciation decreased 24.4% to $248,000. The effective income tax rate was 37.0%, compared with 36.9%.
At June 30, 2013, cash and cash equivalents were $35.0 million and short-term investments were $15.5 million. Working capital was approximately $63.5 million, compared with $61.2 million at March 31, 2013. The company had no debt obligations. Total assets were $81.4 million and total liabilities were $15.4 million.
Cash provided by operations was $19.8 million. Investing activities used $25,000, primarily reflecting $4,000 of capital expenditures, and financing activities used $3.0 million for dividends. Ending cash increased to $35.0 million from $18.2 million at March 31, 2013. The company had approximately $10.2 million remaining under its share repurchase authorization and no off-balance-sheet arrangements.
Material Changes Versus the Prior Comparable Period
- Sales increased $5.2 million, or 7.6%, supported by higher new and repeat orders.
- Gross margin remained unchanged at 32.4%.
- Operating margin expanded from 9.0% to 10.1%, primarily because operating expenses grew more slowly than sales.
- Net income increased 20.3%, and diluted EPS rose from $0.20 to $0.24 despite lower diluted weighted-average shares.
- Operating cash flow increased $6.0 million, helped by a $10.0 million reduction in inventory and a $3.8 million increase in accounts payable.
- Internet sales increased 10.6%, while contact-center sales decreased 2.1%.
- Novartis resumed distribution of some animal-health brands during the quarter, potentially benefiting sales compared with the prior-year period, when a production halt had negatively affected results.
Guidance, Outlook, Risks, and Unusual Items
- Management anticipated advertising expense of approximately 13% of sales for fiscal 2014, subject to quarterly seasonality and advertising availability.
- Management estimated a fiscal 2014 effective tax rate of approximately 37.0%.
- Approximately $1.5 million of capital expenditures were forecast for the remainder of fiscal 2014, expected to be funded from operating cash flow.
- Management stated that future cash could be used for the remaining share repurchase authorization, quarterly dividends, or operating activities, depending on market conditions.
- The company declared a quarterly dividend of $0.17 per share on July 26, 2013, payable August 23, 2013, with an estimated total dividend payable of approximately $3.4 million.
- The board also approved approximately 83,000 restricted shares to employees and outside directors after quarter-end.
- Management cautioned that competition, greater consumer price sensitivity, advertising-market conditions, and seasonal demand for heartworm, flea, and tick products could adversely affect results. Fiscal 2013 sales were approximately 30% in the June quarter, 26% in September, 22% in December, and 22% in March.
- The company has previously settled complaints with various state pharmacy boards and stated that additional state actions are possible. It also initiates litigation to protect trademarks, with no assurance of success.
- All legal proceedings reported in Part II, Item 1 were listed as none. Management stated that disclosure controls were effective and that no significant changes to internal control over financial reporting occurred during the quarter.
Important Facts for Investors to Verify
- Whether sales growth and customer acquisition remain durable after the favorable comparison with the prior-year Novartis supply disruption.
- Whether the expected advertising ratio of approximately 13% of sales is achieved without pressuring customer acquisition or margins.
- The sustainability of operating cash flow, particularly the extent to which the quarter benefited from inventory reductions and higher accounts payable.
- The effect of seasonality and competitive pricing on future gross margins and sales.
- Future uses of the substantial cash and investment balances, including dividends and share repurchases.
- Potential regulatory or trademark-related litigation and related costs.
- The filing’s caution that quarterly results are not necessarily indicative of full-year fiscal 2014 results.