PetMed Express, Inc. — Fiscal 2020 Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2020, filed May 26, 2020. The filing is an annual report rather than a quarterly filing; fourth-quarter data for the period ended March 31, 2020 is included on an unaudited basis.
Business Context
PetMed Express, 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, cats, and horses. Approximately 84% of fiscal 2020 sales were generated through the Internet, and the company operated primarily from its single Delray Beach, Florida headquarters and fulfillment center.
- Approximately 2,500 SKUs and approximately 2.3 million customers who purchased within the preceding two years.
- Approximately 421,000 new customers acquired in fiscal 2020 versus 467,000 in fiscal 2019.
- Average purchase was approximately $87 in both fiscal 2020 and fiscal 2019.
- Approximately 87.5% of sales were reorder sales, compared with 85.3% in fiscal 2019.
Financial Performance and Liquidity
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Sales | $284.1 million | $283.4 million | 0.2% increase |
| Gross profit | $81.2 million | $95.3 million | 14.8% decrease |
| Gross margin | 28.6% | 33.6% | Down 5.0 percentage points |
| Operating income | $31.0 million | $46.2 million | 32.9% decrease |
| Net income | $25.9 million | $37.7 million | 31.5% decrease |
| Diluted EPS | $1.29 | $1.84 | Decrease of $0.55 |
| Cash flow from operations | $38.8 million | $45.1 million | Decrease of $6.3 million |
| Cash and cash equivalents | $103.8 million | $100.5 million | Increase of $3.2 million |
- Operating expenses were $50.3 million, or 17.7% of sales, versus $49.1 million, or 17.3% of sales, in fiscal 2019.
- Advertising expense increased to $22.7 million from $22.1 million; customer acquisition cost increased to approximately $54 from $47.
- Cost of sales increased 7.9% to $202.9 million, reflecting customer price reductions and higher product costs.
- Effective tax rate was 23.7%, compared with 23.2% in fiscal 2019.
- Working capital was $104.7 million, compared with $107.8 million at March 31, 2019.
- The company had no debt obligations at March 31, 2020 and reported no off-balance-sheet arrangements.
- Net cash used in investing activities was $2.3 million, primarily for property and equipment, including the new e-commerce platform.
- Net cash used in financing activities was $33.3 million, including $21.8 million of dividends and $11.5 million for repurchasing approximately 613,000 shares.
Fourth-Quarter Fiscal 2020 Data
| Metric | Quarter ended March 31, 2020 | Quarter ended March 31, 2019 |
|---|---|---|
| Sales | $74.3 million | $64.6 million |
| Gross profit | $21.7 million | $20.7 million |
| Operating income | $8.5 million | $7.8 million |
| Net income | $7.0 million | $6.6 million |
| Diluted EPS | $0.35 | $0.32 |
Material Changes Versus the Prior Comparable Period
- Sales were essentially flat because higher reorder sales of $248.6 million offset a 14.6% decline in new-order sales to $35.6 million.
- Gross margin declined materially because of pricing reductions intended to stimulate demand amid increased online competition and higher product costs.
- Net income and diluted EPS declined substantially despite stable revenue.
- Internet sales declined 0.8% to $238.1 million, while contact-center sales increased 6.2% to $46.1 million.
- The company established direct purchasing relationships with all major pet medication manufacturers, subject to minimum advertised pricing policies.
- The company adopted the new lease accounting standard on April 1, 2019; the reported impact was not material, with approximately $110,000 of right-of-use assets and current lease liabilities at year-end.
- Shareholders’ equity declined to $130.0 million from $134.7 million, primarily reflecting dividends and share repurchases, partly offset by net income.
Guidance, Outlook, Risks, and Unusual Items
- Management anticipated advertising expense at approximately 9% of sales for fiscal 2021 and an effective tax rate of approximately 23.5%; both estimates may fluctuate.
- Management forecast approximately $4.5 million of fiscal 2021 capital expenditures funded from operating cash flow.
- The company expected to continue regular quarterly dividends, but future declarations remain discretionary. The quarterly dividend was increased from $0.27 to $0.28 per share in May 2020, with a $5.6 million payment made on May 22, 2020.
- COVID-19 increased e-commerce demand in the fourth quarter and the company operated as an essential business without material disruption through the filing date. Management cautioned that the benefit may not be indicative of future results and that future effects on employees, fulfillment, supply chains, liquidity, and demand remained uncertain.
- Key risks include pharmacy licensing and regulatory compliance, prescription authorization by veterinarians, competition and price pressure, manufacturer minimum advertised pricing requirements, supplier concentration, inventory management, dependence on a single facility, cybersecurity and system disruptions, payment fraud, seasonality, and COVID-19-related disruption.
- Three suppliers represented approximately 60% of product purchases in fiscal 2020, creating concentration risk.
- A website accessibility class action was resolved through a confidential settlement and consent decree; the matter was dismissed on March 23, 2020. Management characterized other litigation and pharmacy-board complaints as routine and not expected to have a material adverse effect.
- The company’s Florida pharmacy license was valid through February 28, 2021, with renewal expected before expiration.
Investor Verification Items
- Verify whether the fiscal 2020 margin compression from pricing and product costs persists or reverses.
- Assess new-customer acquisition trends, advertising efficiency, and the sustainability of reorder growth.
- Monitor COVID-19-related demand normalization, fulfillment capacity, employee availability, and supplier disruptions.
- Review compliance with pharmacy licenses, prescription authorization rules, and manufacturer minimum advertised pricing policies.
- Evaluate supplier concentration and the effect of any changes in manufacturer rebates, discounts, or purchasing relationships.
- Confirm the company’s ability to fund dividends, share repurchases, and planned capital expenditures from operating cash flow.
- Review the company’s single-site operating model and exposure to hurricanes, outages, cybersecurity incidents, and other business interruptions.
- Confirm the continued effectiveness of internal controls and the absence of material changes following the unqualified audit opinion.