PetMed Express, Inc. — Form 10-Q Summary
Business Context and Reporting Period
PetMed Express, Inc., operating as 1-800-PetMeds, markets prescription and non-prescription pet medications, health products, and supplies directly to consumers, primarily in the United States. The filing covers the quarter and nine months ended December 31, 2014, within fiscal 2015. The fiscal year ends March 31, 2015.
Approximately 80% of quarterly sales were generated through the Internet, compared with 79% in the prior-year quarter. The average purchase increased to approximately $76 from $72 year over year.
Financial Performance and Key Metrics
| Metric | Three Months Ended December 31 | Nine Months Ended December 31 |
|---|---|---|
| Sales | $49.3 million; down 1.6% | $179.4 million; down 2.9% |
| Gross profit | $17.1 million; up 1.2% | $59.3 million; down 1.4% |
| Gross margin | 34.7%, versus 33.7% | 33.1%, versus 32.6% |
| Income from operations | $7.7 million; up 8.8% | $19.8 million; down 6.1% |
| Operating margin | 15.6%, versus 14.1% | 11.0%, versus 11.4% |
| Net income | $4.8 million; up 5.6% | $12.5 million; down 7.0% |
| Diluted EPS | $0.24, versus $0.23 | $0.62, versus $0.67 |
| Net cash from operations | Not separately provided | $29.5 million, versus $17.7 million |
Cost of sales declined to 65.3% of sales in the quarter and 66.9% for the nine-month period, compared with 66.3% and 67.4%, respectively. Management attributed the improvement to lower product costs for certain brands and a shift toward higher-margin products.
At December 31, 2014, cash and cash equivalents were $37.1 million and short-term investments were $15.6 million, for total cash and investments of $52.6 million. Total assets were $79.8 million, total liabilities were $6.3 million, and shareholders’ equity was $73.5 million. The company reported no debt obligations and no off-balance-sheet arrangements.
Working capital was $71.5 million, compared with $66.1 million at March 31, 2014. Inventory declined to $21.6 million from $35.7 million. The company paid $10.4 million in dividends during the first nine months and declared an additional $0.17-per-share quarterly dividend payable February 13, 2015.
Material Changes Versus the Prior Comparable Period
- Sales declined because of lower new-order and reorder sales, including weaker demand for flea and tick topical medications.
- New customers declined to approximately 96,000 in the quarter from 114,000, and to 432,000 for the nine months from 490,000.
- New-order sales declined 7.5% in the quarter and 6.9% for the nine months; reorder sales declined 0.5% and 2.0%, respectively.
- Contact-center sales declined 5.9% in the quarter and 8.1% for the nine months, while Internet sales declined 0.5% and 1.5%, respectively.
- Advertising expense declined 4.3% in the quarter and 3.5% for the nine months, but customer acquisition cost increased to $45 from $40 for the quarter and to $49 from $45 for the nine months.
- The company incurred a $1.7 million one-time charge in the September 2014 quarter for discontinuing an information-technology software project. The after-tax impact was approximately $1.1 million, or $0.05 diluted EPS. No additional expenditures are expected.
- Nine-month operating results and EPS were reduced by the discontinued project charge, despite stronger cash generation from lower inventory and prepaid expenses.
- The effective tax rate increased to approximately 37.8% from 36.0% in the quarter and to 37.3% from 36.6% for the nine months, partly because of a one-time prior-year tax over-accrual benefit and a current-year tax under-accrual charge.
Guidance, Outlook, Risks, and Unusual Items
- Management expects fiscal 2015 advertising expense to be approximately 11% to 12% of sales and estimates an effective tax rate of approximately 37.0%.
- Approximately $750,000 of capital expenditures is forecast for the remainder of fiscal 2015, funded from operating cash flow.
- The company expects to continue using cash for dividends, its share repurchase plan, and operating activities. Approximately $10.2 million remained available under the repurchase plan at December 31, 2014.
- Management cited increased competition, consumer price sensitivity, advertising-market conditions, and seasonal demand for heartworm, flea, and tick medications as risks to sales and profitability.
- Results are seasonal and quarterly results are not necessarily indicative of full-year performance.
- The company had no legal proceedings reported, no debt, no outstanding capital expenditure purchase or lease commitments beyond its facility lease, and no reported changes materially affecting internal controls.
- The company is evaluating the potential impact of the new revenue-recognition standard, ASU 2014-09, which is effective for its fiscal year beginning April 1, 2017.
Investor Verification Checklist
- Verify whether declining new-customer acquisition and reorder activity persist, particularly in flea and tick products.
- Assess whether gross-margin improvement is sustainable or primarily reflects temporary product mix and supplier-cost benefits.
- Monitor customer acquisition cost, advertising efficiency, and management’s 11%–12% fiscal 2015 advertising expectation.
- Confirm the cash-flow benefit from inventory reduction and whether inventory levels remain appropriate for seasonal demand.
- Verify the effect of dividends and potential share repurchases on cash balances and per-share results.
- Review the company’s fiscal 2014 Form 10-K for the detailed risk factors referenced in this filing.