PetMed Express, Inc. 10-Q Summary
Business context and reporting period
PetMed Express, Inc., operating 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 quarter and six months ended September 30, 2018, the second quarter of fiscal 2019. Financial statements are unaudited and presented in thousands, except per-share data.
Key financial metrics
| Metric | Three months ended September 30, 2018 | Three months ended September 30, 2017 | Six months ended September 30, 2018 | Six months ended September 30, 2017 |
|---|---|---|---|---|
| Sales | $71.4 million | $66.7 million | $158.8 million | $146.4 million |
| Gross profit | $25.3 million | $23.5 million | $55.2 million | $50.9 million |
| Gross margin | 35.4% | 35.2% | 34.8% | 34.8% |
| Income from operations | $13.2 million | $12.2 million | $29.0 million | $26.7 million |
| Net income | $10.8 million | $8.8 million | $23.3 million | $18.0 million |
| Net margin | 15.1% | 13.1% | 14.7% | 12.3% |
| Diluted EPS | $0.52 | $0.43 | $1.14 | $0.88 |
| Operating cash flow | Not separately provided | Not separately provided | $20.4 million | $18.3 million |
At September 30, 2018, cash and cash equivalents were $87.1 million, compared with $77.9 million at March 31, 2018. Working capital was $102.1 million, versus $87.1 million at fiscal year-end. Total liabilities were $18.2 million and the company reported no debt obligations. Most cash and cash equivalents were invested in money market funds.
Six-month investing cash outflows were $0.5 million, primarily for property and equipment. Financing cash outflows were $10.8 million for dividends. Dividends declared were $0.27 per common share for the quarter and $0.52 per share for the six-month period.
Material changes versus the prior comparable period
- Quarterly sales increased 7.0%; six-month sales increased 8.5%, primarily from higher reorder sales.
- Quarterly reorder sales increased 10.7%, while new-order sales declined 10.6%. For six months, reorder sales increased 10.8% and new-order sales declined 2.0%.
- Internet sales represented 84.5% of quarterly sales and 84.8% of six-month sales, compared with 84.2% and 83.9%, respectively, in the prior-year periods.
- New-customer additions declined to approximately 117,000 for the quarter and 286,000 for six months, from approximately 134,000 and 302,000, respectively.
- Advertising expense increased 17% for the quarter and 11% for six months. Customer acquisition cost increased to $45 per new customer for the quarter and $42 for six months, compared with $34 and $36, respectively.
- Quarterly gross margin improved modestly due mainly to product mix, partially offset by additional customer discounts. Six-month gross margin was unchanged.
- Net income benefited from lower tax rates following the Tax Cuts and Jobs Act. The effective tax rate declined to 22.6% for the quarter and 23.1% for six months, from 30.7% and 34.1%, respectively.
- The company adopted ASC 606 revenue recognition on April 1, 2018, using the modified retrospective method. No opening retained-earnings or balance-sheet adjustment was recorded, and revenue continues to be recognized upon shipment.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects advertising expense to be approximately 7.0% to 8.0% of fiscal 2019 sales, subject to seasonality and advertising availability.
- Approximately $600,000 of capital expenditures was forecast for the remainder of fiscal 2019, expected to be funded from operating cash flow.
- Management stated that future sales may be adversely affected by increased competition and greater consumer price sensitivity. Product demand is seasonal, particularly for heartworm and flea-and-tick medications.
- Interest income could decline if cash is used for share repurchases, dividends, or operating activities. Approximately $10.2 million remained available under the share repurchase plan at September 30, 2018; no issuer purchases occurred during the quarter.
- The board declared a $0.27-per-share dividend on October 22, 2018, payable November 16, 2018, with an estimated total payable of approximately $5.6 million.
- The company had no outstanding lease commitments, no off-balance-sheet arrangements, and no material legal proceedings reported in Part II. It noted potential future actions by state pharmacy boards and ongoing efforts to protect trademarks.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether reorder-driven growth can offset declining new-order sales and lower new-customer additions.
- Whether higher advertising spending and customer acquisition costs generate sustainable customer lifetime value and future reorder revenue.
- The effect of competition, pricing pressure, seasonality, and product mix on gross margins.
- Future cash deployment among dividends, the remaining share repurchase authorization, capital expenditures, and operating needs.
- Cash concentration and interest-rate exposure from the company’s money market investments.
- Potential regulatory or trademark-related proceedings despite no legal proceedings being reported in this quarter’s filing.