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 pet supplies primarily for dogs and cats. The company markets through television, internet, and direct-mail advertising. This report covers the quarter and nine months ended December 31, 2011, within fiscal 2012. Financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2011 | Year-over-Year Change | Nine Months Ended Dec. 31, 2011 | Year-over-Year Change |
|---|---|---|---|---|
| Sales | $50.5 million | +12.0% | $182.3 million | +0.9% |
| Gross profit | $17.2 million | +1.4% | $61.2 million | -7.9% |
| Gross margin | 34.0% | Down from 37.5% | 33.6% | Down from 36.8% |
| Income from operations | $6.1 million | -13.2% | $19.7 million | -25.7% |
| Net income | $3.9 million | -13.8% | $12.7 million | -24.3% |
| Diluted EPS | $0.19 | Down from $0.20 | $0.61 | Down from $0.74 |
| Net cash from operations | Not provided for the quarter | — | $13.7 million | Down from $31.5 million |
Operating margin was 12.1% for the quarter and 10.8% for the nine-month period, compared with 15.6% and 14.7%, respectively, in the prior-year periods. Net margin was 7.7% for the quarter and 7.0% for the nine months, compared with 10.0% and 9.3%.
- Advertising expense rose 22.6% to $5.4 million in the quarter and 7.3% to $23.5 million for the nine months. Management expects advertising to represent approximately 13% of fiscal 2012 sales.
- Cost of sales increased to 66.0% of quarterly sales and 66.4% of nine-month sales, primarily due to more aggressive pricing and higher product costs.
- Cash and cash equivalents totaled $42.0 million at December 31, 2011, compared with $49.7 million at March 31, 2011.
- Short-term investments were $10.3 million and long-term investments were $1.5 million. Total investments declined to $11.8 million from $22.5 million at March 31, 2011.
- Working capital was $74.9 million, compared with $80.6 million at March 31, 2011. The company reported no debt obligations.
- Total liabilities were $8.6 million and shareholders’ equity was $79.8 million at December 31, 2011.
- The company paid $7.9 million in dividends and repurchased and retired approximately 2.1 million shares for $23.7 million during the nine months. Approximately $14.0 million remained under the repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Quarterly sales benefited from higher new-order and reorder sales, increased advertising, and lower customer-acquisition costs. New customers increased to approximately 150,000 from 111,000.
- Nine-month sales growth was limited to 0.9%, with reorder sales slightly declining and new-order sales increasing 4.9%.
- Internet sales increased to 76.5% of quarterly sales from 71.8%; contact-center sales declined 6.7%. Management reported approximately 77% of sales were generated through the internet.
- The average retail purchase declined to approximately $73 per order for the quarter from $77, and to $77 for the nine months from $80.
- Profitability declined despite higher quarterly sales because pricing actions and higher product costs reduced gross margin, while advertising spending increased.
- Operating cash flow fell by $17.8 million year over year, primarily because inventory increased by $0.8 million, compared with a $14.2 million inventory reduction in the prior-year period.
- Investing cash flow was $10.3 million provided, compared with $10.6 million used in the prior-year period, primarily reflecting liquidation of investments.
- Weighted-average diluted shares declined to 20.2 million for the quarter and 20.9 million for the nine months, versus 22.7 million and 22.8 million, respectively, due largely to share repurchases.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management estimated a fiscal 2012 effective tax rate of approximately 37.0% and expected approximately $100,000 of capital expenditures for the remainder of the fiscal year, funded from operating cash flow.
- The company cited increased competition, consumer price sensitivity, trading down to generics, seasonality, and uncertainty regarding future sales growth. More aggressive pricing has already reduced gross margins.
- In January 2012, Novartis Consumer Health halted production of several animal-health brands, including Sentinel, Interceptor, Program, Deramaxx, and Clomicalm. The company had limited inventory and stated that a prolonged disruption could negatively affect future sales.
- The company held $1.5 million of auction-rate securities classified as long-term investments. These securities remain illiquid and are valued using Level 3 inputs. The company recorded a cumulative temporary impairment of approximately $20,000 and an unrealized recovery of $16,000 during the quarter.
- A patent-infringement lawsuit remains pending in federal court. The company’s prior software vendor ceased indemnification effective February 15, 2011. Management stated that the outcome and potential loss cannot currently be estimated.
- The company reported no off-balance-sheet arrangements, no defaults, and no outstanding debt. Management stated that it has no current need or plans to obtain additional capital.
- On January 30, 2012, the board declared a $0.15-per-share quarterly dividend, estimated at approximately $3.1 million based on shares outstanding at January 31, 2012.
- Management concluded that disclosure controls and procedures were effective as of December 31, 2011, with no significant changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether sales growth can continue after the quarter’s increase in advertising and new-customer acquisition.
- Whether gross margins stabilize after pricing reductions and higher product costs.
- The effect of the Novartis product-supply disruption on product availability, revenue, and customer retention.
- The timing and recoverability of the remaining $1.5 million in auction-rate securities.
- The potential financial exposure and resolution of the patent litigation and any future pharmacy-board matters.
- The sustainability of dividends and share repurchases given lower operating cash flow and reduced cash balances.
- The impact of seasonality, competitive pricing, generic substitution, and advertising costs on fiscal 2012 results.