PetMed Express, Inc. 2013 Form 10-K 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 for dogs and cats. The filing covers the fiscal year ended March 31, 2013. Although the request references 2012 Q4, this is an annual filing; the comparable fourth-quarter period ended March 31, 2013 is also presented.
- Approximately 3,000 SKUs; 59% of fiscal 2013 sales were non-prescription products, 40% prescription medications, and 1% shipping and other charges.
- Internet sales represented 77.2% of fiscal 2013 sales, up from 75.0% in fiscal 2012.
- Approximately 630,000 new customers were acquired in fiscal 2013 versus 722,000 in fiscal 2012.
Financial performance and key metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Sales | $227.8 million | $238.3 million | Down 4.4% |
| Gross profit | $77.1 million | $80.2 million | Down 3.8% |
| Gross margin | 33.9% | 33.7% | Up 0.2 percentage points |
| Operating income | $27.0 million | $26.0 million | Up 3.8% |
| Operating margin | 11.9% | 10.9% | Up 1.0 percentage point |
| Net income | $17.2 million | $16.7 million | Up 3.0% |
| Net margin | 7.5% | 7.0% | Up 0.5 percentage points |
| Diluted EPS | $0.86 | $0.80 | Up $0.06 |
| Cash flow from operations | $13.3 million | $20.4 million | Down $7.1 million |
- Cash and cash equivalents were $18.2 million at March 31, 2013, and short-term investments were $15.5 million, for total cash and short-term investments of $33.6 million.
- Working capital was $61.2 million, down from $78.2 million, primarily because of dividends and share repurchases.
- The company had no debt obligations and no off-balance-sheet arrangements.
- Inventory increased to $31.6 million from $26.2 million, contributing to lower operating cash flow.
- Fiscal 2013 financing cash outflows included $32.0 million of dividends and $3.9 million of share repurchases.
- Quarterly sales for the periods ended June 30, September 30, December 31, and March 31 were $69.0 million, $58.1 million, $49.6 million, and $51.1 million, respectively. Fourth-quarter net income was $4.6 million and diluted EPS was $0.23.
Material changes versus the prior comparable period
- Sales declined because of lower new-order and reorder sales, reduced advertising, lower average order size, increased competition, additional discounts, and the unavailability of certain Novartis brands after suspended production.
- New-order sales decreased 16.1% to $43.0 million, while reorder sales decreased 1.2% to $184.8 million.
- Average purchase size declined to approximately $73 from $76.
- Cost of sales declined 4.7%, and the cost-of-sales ratio improved to 66.1% from 66.3%, reflecting a product mix shift toward lower-cost and generic products.
- Advertising expense declined 9.7% to $27.4 million, while advertising cost per new customer increased to $44 from $42.
- General and administrative expense declined 3.4% to $21.6 million, and depreciation declined to $1.1 million from $1.4 million.
- Net income increased despite lower sales because of lower operating expenses and improved gross margin.
- The company repurchased approximately 397,000 shares for $3.9 million in fiscal 2013, compared with approximately 2.1 million shares for $23.7 million in fiscal 2012. Approximately $10.2 million remained available under the repurchase plan at March 31, 2013.
Guidance, outlook, risks and unusual items
- Management anticipated advertising expense of approximately 13% of sales and an effective tax rate of approximately 37% for fiscal 2014. It also forecast approximately $1.5 million of fiscal 2014 capital expenditures funded from operating cash flow.
- Management planned to improve advertising efficiency, expand product offerings, and emphasize higher-margin products, including generics. There was no formal sales or earnings forecast.
- A special dividend of $1.00 per share, totaling approximately $20.0 million, was declared and paid in December 2012. Regular quarterly dividends were $0.15 per share; future dividends remain discretionary.
- Key risks include pharmacy licensing and regulatory compliance in Florida and other states, administrative complaints concerning prescription authorization, reliance on third-party distributors, supplier concentration, inventory management, competition and pricing pressure, seasonality, and resistance from veterinarians to authorizing prescriptions.
- Five suppliers accounted for approximately 50% of product purchases in fiscal 2013. The company also relies on a single South Florida operating and distribution location, creating exposure to hurricanes, facility disruptions, and transportation interruptions.
- The EPA’s potential additional restrictions on flea and tick products could reduce sales and profits. Information-system failures, cybersecurity incidents, and unauthorized disclosure of customer data could also materially affect operations.
- The company leases its facilities through May 31, 2015, with remaining minimum lease payments of approximately $1.7 million. An amended CEO employment agreement provides for a three-year term beginning March 16, 2013, annual salary of $550,000, and 108,000 restricted shares.
- McGladrey LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls as of March 31, 2013.
Most important facts for investors to verify
- Whether sales growth resumes after the fiscal 2013 decline and whether new-customer acquisition and average order size improve.
- The durability of gross-margin improvement from generics and product mix versus ongoing discounting and competitive pricing.
- Inventory levels, obsolescence reserves, supplier availability, and the effect of discontinued or unavailable branded products.
- The sustainability of quarterly and special dividend payments and any additional share repurchases relative to operating cash flow and liquidity.
- Compliance with state pharmacy regulations, prescription-authorization requirements, and the status of any future administrative complaints.
- Exposure to supplier concentration, veterinarian opposition, EPA restrictions, cybersecurity events, and disruption at the company’s single operating location.