PetMed Express, Inc. 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 supplies for dogs and cats. This Form 10-Q covers the quarter and six months ended September 30, 2017, within fiscal 2018. The company primarily serves U.S. customers and markets through national advertising, its website, and contact-center sales.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Six Months Ended September 30 |
|---|---|---|
| Sales | $66.7 million, up 9.7% | $146.4 million, up 9.8% |
| Gross profit | $23.5 million; 35.2% margin | $50.9 million; 34.8% margin |
| Income from operations | $12.2 million; 18.3% margin | $26.7 million; 18.2% margin |
| Net income | $8.8 million; 13.1% margin | $18.0 million; 12.3% margin |
| Diluted earnings per share | $0.43 | $0.88 |
| Net cash provided by operating activities | Not separately provided | $18.3 million |
| Cash and cash equivalents at period end | $68.4 million |
- Cost of sales was $43.2 million in the quarter and $95.4 million for the six-month period.
- Operating expenses were $11.2 million in the quarter and $24.3 million for the six-month period. Depreciation increased substantially due to the new headquarters and distribution facility.
- Advertising expense was $4.5 million in the quarter and $10.8 million year to date. Management expects advertising to represent approximately 7.0% to 8.0% of fiscal 2018 sales.
- Working capital was $75.3 million at September 30, 2017, compared with $63.4 million at March 31, 2017.
- The company had no debt obligations, no outstanding lease commitments, and no off-balance-sheet arrangements at September 30, 2017.
- Shareholders’ equity was $104.3 million, compared with $93.4 million at March 31, 2017.
- The company declared quarterly dividends of $0.20 per common share during the period and paid $8.2 million in dividends during the first six months.
Material Changes Versus the Prior Comparable Period
- Quarterly sales increased $5.9 million, or 9.7%, while six-month sales increased $13.1 million, or 9.8%.
- New customers increased to approximately 134,000 in the quarter from 131,000, and to approximately 302,000 year to date from 289,000.
- Internet sales represented 84.2% of quarterly sales and 83.9% of six-month sales, compared with 82.3% and 82.1%, respectively, in the prior-year periods. Contact-center sales declined.
- Reorder sales increased 9.9% in the quarter and 9.4% year to date; new-order sales increased 8.8% and 11.7%, respectively.
- Gross margin improved to 35.2% from 29.7% in the quarter and to 34.8% from 30.4% year to date. Management attributed the improvement primarily to a favorable mix of higher-margin flea, tick, and heartworm products, partially offset by additional customer discounts.
- Net income increased 78.8% in the quarter and 56.9% year to date. The effective tax rate declined to 30.7% from 37.1% in the quarter and to 34.1% from 37.1% year to date, partly because of an $807,000 tax benefit related to restricted stock compensation.
- Operating cash flow declined to $18.3 million from $27.8 million year to date, primarily because of increased inventory and changes in accounts payable. Capital expenditures fell to $350,000 from $5.9 million due to the prior-year facility investment.
- Cash increased $9.7 million during the first six months, ending at $68.4 million after $8.2 million of dividend payments.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects approximately $500,000 of capital expenditures during the remainder of fiscal 2018, funded from operating cash flow.
- The company expects to use cash, depending on market conditions, for operations, dividends, and the remaining approximately $10.2 million authorization under its share repurchase plan. No shares were repurchased during the reported six-month period.
- Sales are seasonal, particularly because of flea, tick, and heartworm medications. Management also cited increased competition and consumer price sensitivity as risks to future growth.
- In June 2017, a veterinary clinic filed a putative class action alleging unsolicited fax advertising in violation of the Telephone Consumer Protection Act. The company disputes the allegations and states that any potential loss cannot currently be estimated.
- Two putative securities class actions were filed in August and September 2017 by shareholders alleging securities-law violations based on an anonymous online report. The company considers the allegations unfounded and intends to defend the cases. Damages sought were unspecified.
- The company has faced prior complaints from state regulatory boards and states that additional regulatory actions cannot be ruled out.
- The company early adopted ASU 2016-09 for stock compensation. Tax effects from restricted-stock vesting may materially affect the effective tax rate in future periods, depending partly on the company’s stock price.
- The company expects the new revenue-recognition standard to have no material financial effect other than increased disclosures, but its assessment was not yet complete. Adoption is anticipated using the modified retrospective method in fiscal 2019.
- Management reported that disclosure controls and procedures were effective and that there were no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Verify whether the improved gross margin is sustainable as product mix, discounts, competition, and pricing change.
- Monitor inventory growth and operating cash conversion, given the year-to-date decline in operating cash flow.
- Assess the potential financial and reputational impact of the TCPA and securities class-action litigation; the filing does not provide a clear loss estimate.
- Track the effect of restricted-stock vesting and share-price movements on future income tax rates and earnings.
- Confirm the timing and amount of future dividends, share repurchases, and the remaining fiscal 2018 capital expenditures.
- Evaluate customer acquisition costs, reorder trends, Internet-sales mix, and seasonality as indicators of future sales growth.