PetMed Express, Inc. 10-Q Summary
Business context and reporting period
PetMed Express, Inc. markets prescription and non-prescription pet medications, health products, and supplies primarily to U.S. retail customers through its PetMeds brand. The filing covers the quarter and six months ended September 30, 2022, the second quarter and first six months of fiscal 2023. The company reported 21.1 million common shares outstanding as of November 8, 2022.
Key financial metrics
| Metric | Three months ended September 30, 2022 | Three months ended September 30, 2021 | Six months ended September 30, 2022 | Six months ended September 30, 2021 |
|---|---|---|---|---|
| Sales | $65.4 million | $67.4 million | $135.6 million | $146.7 million |
| Gross profit | $18.5 million | $19.2 million | $38.4 million | $41.0 million |
| Gross margin | 28.2% | 28.5% | 28.3% | 27.9% |
| Income from operations | $3.0 million | $8.1 million | $6.5 million | $13.5 million |
| Net income | $2.6 million | $6.3 million | $5.4 million | $10.8 million |
| Net margin | 3.9% | 9.4% | 3.9% | 7.3% |
| Diluted EPS | $0.13 | $0.31 | $0.26 | $0.53 |
| Adjusted EBITDA | $7.1 million | $9.8 million | $13.4 million | $16.9 million |
Six-month operating cash flow was $5.1 million, compared with $1.1 million in the prior-year period. Investing cash outflow was $7.3 million, including the $5.0 million Vetster investment and $2.3 million of capital expenditures. Financing cash outflow was $12.3 million, primarily quarterly dividends.
At September 30, 2022, cash and cash equivalents were $96.5 million, working capital was $107.7 million, and total debt was zero. Inventory was $34.0 million, accounts payable was $24.0 million, and total liabilities were $31.1 million. The company had approximately $28.7 million remaining under its share repurchase authorization.
Material changes versus the prior comparable period
- Quarterly sales declined 3.0% and six-month sales declined 7.6%, primarily due to higher customer acquisition costs and competitive pressure.
- New-order sales declined 15.9% in the quarter and 27.9% for the six-month period. New customers acquired fell to approximately 61,000 in the quarter and 130,000 year to date, compared with approximately 80,000 and 195,000, respectively, under the revised 36-month customer definition.
- Internet sales increased 1.0% in the quarter but declined 4.5% for the six-month period. Contact-center sales declined 22.6% and 22.9%, respectively.
- Quarterly gross margin declined 30 basis points, primarily due to higher freight expense per order and lower margins on over-the-counter products. Six-month gross margin increased 40 basis points, primarily due to lower product discounts.
- General and administrative expense increased 54.5% in the quarter and 34.0% for the six-month period. Drivers included investments in people and systems, higher stock-based compensation, professional fees, $364,000 of severance, and a $925,000 estimated state sales-tax assessment accrual.
- Quarterly advertising expense increased 12.9%, while six-month advertising expense decreased 7.9%. Advertising cost per acquired customer increased to $64 for the quarter and $79 for the six-month period, from $43 and $57, respectively.
- The effective tax rate increased to 28.6% for the quarter and 27.8% for the six-month period, compared with 23.8% and 23.7%, respectively, primarily due to increased state taxes.
Guidance, outlook, risks, contingencies, and unusual items
- AutoShip sales represented 39% of quarterly net sales, compared with 15% in the prior-year quarter and 34% sequentially. Management set a fiscal 2023 goal of approximately 50% of net sales through AutoShip.
- Management stated that future sales may be adversely affected by increased competition, price sensitivity, changing post-pandemic consumer behavior, customer acquisition costs, and seasonality in flea, tick, and heartworm products. No formal revenue or earnings guidance was provided.
- On April 19, 2022, the company entered a three-year partnership with Vetster, purchased a 5% minority interest for $5.0 million, and received performance-based warrants. PetMed Express became Vetster’s exclusive e-commerce provider, while Vetster became the company’s exclusive telehealth and telemedicine provider.
- The company recorded a $925,000 estimated state sales-tax assessment reserve and stated that additional contingencies are not currently estimable. Management believes existing reserves are adequate.
- The company accrued $364,000 of severance related to its former chief financial officer. Christine Chambers became CFO effective August 3, 2022.
- The company reported no material legal proceedings, no material lease commitments, no derivative instruments, and no material debt obligations. It cautioned that pharmacy-board actions, intellectual-property matters, litigation, supply-chain delays, shipping disruptions, inflation, labor availability, and COVID-19 developments could adversely affect results.
- On November 7, 2022, the board declared a $0.30 per-share quarterly dividend, estimated at approximately $6.3 million, payable November 30, 2022 to shareholders of record November 18, 2022.
Investor verification points
- Verify whether the decline in new-customer acquisition and elevated acquisition costs persist, and whether AutoShip adoption reaches the approximately 50% fiscal 2023 target.
- Assess whether increased general and administrative spending, stock compensation, severance, and sales-tax costs are recurring or nonrecurring.
- Monitor gross-margin trends, freight costs, over-the-counter product margins, discounting, and competitive pricing.
- Review the performance, accounting treatment, and potential impairment risk of the Vetster investment and related partnership.
- Confirm the adequacy of the $925,000 state sales-tax reserve and monitor any additional assessments or legal contingencies.
- Evaluate cash deployment among dividends, share repurchases, operating needs, capital expenditures, and strategic investments, given the decline in cash from $111.1 million at March 31, 2022 to $96.5 million at September 30, 2022.