PetMed Express, Inc. — Form 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 for dogs and cats. The filing covers the quarter and nine months ended December 31, 2013, within fiscal 2014. The company markets through television, online, and direct-mail/print advertising. Approximately 79% of quarterly sales were generated through the Internet.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2013 | Nine Months Ended Dec. 31, 2013 |
|---|---|---|
| Sales | $50.1 million | $184.8 million |
| Gross profit | $16.9 million; 33.7% margin | $60.2 million; 32.6% margin |
| Income from operations | $7.0 million; 14.1% margin | $21.1 million; 11.4% margin |
| Net income | $4.5 million; 9.1% margin | $13.4 million; 7.3% margin |
| Diluted earnings per share | $0.23 | $0.67 |
| Net cash provided by operating activities | Not separately provided | $17.7 million |
At December 31, 2013, cash and cash equivalents were $25.9 million and short-term investments were $15.5 million. Total liquidity represented by these balances was approximately $41.5 million. Working capital was $64.5 million. The company had no outstanding debt obligations and no off-balance-sheet arrangements.
Total assets were $75.1 million and total shareholders’ equity was $68.8 million at December 31, 2013. Inventory was $24.5 million. The company paid $9.9 million in dividends during the first nine months and had approximately $10.2 million remaining under its share-repurchase authorization.
Material Changes Versus Prior Comparable Period
- Third-quarter sales increased 1.0% to $50.1 million; nine-month sales increased 4.6% to $184.8 million.
- Quarterly reorder sales increased 3.6%, while new-order sales declined 11.5%. For nine months, reorder sales increased 5.5% and new-order sales increased 0.6%.
- New-customer acquisitions declined to approximately 114,000 in the quarter from 131,000 and to approximately 490,000 for nine months from 504,000.
- Average order value increased to approximately $72 for the quarter from $71 and to approximately $74 for nine months from $72.
- Quarterly gross profit declined 1.9%, and gross margin decreased from 34.7% to 33.7%. Nine-month gross profit increased 2.2%, while gross margin decreased from 33.3% to 32.6%.
- Management attributed margin pressure primarily to higher product costs and increased promotional discounts.
- Quarterly operating income declined 2.2% to $7.0 million, while nine-month operating income increased 6.8% to $21.1 million.
- Quarterly net income decreased 0.8%; nine-month net income increased 7.0%.
- Operating cash flow declined from $21.8 million to $17.7 million, principally due to a greater reduction in accounts payable and increased prepaid expenses.
- Financing cash use declined to $9.8 million from $32.9 million, primarily because dividend payments were lower and no share repurchases occurred in the current period.
Guidance, Outlook, Risks, and Unusual Items
- Management anticipated advertising expense at approximately 12% of fiscal 2014 sales, subject to quarterly seasonality and advertising availability.
- Management estimated a fiscal 2014 effective tax rate of approximately 37.0%.
- Approximately $2.0 million of planned capital expenditures for the remainder of fiscal 2014 was deferred to fiscal 2015 and is expected to be funded from operating cash flow.
- The board declared a quarterly dividend of $0.17 per share on January 30, 2014, payable February 21, 2014, with an estimated total payable of approximately $3.4 million.
- Sales are seasonal, particularly for heartworm and flea-and-tick products. Management also cited competition, price sensitivity, advertising conditions, customer-acquisition costs, and product availability as risks.
- Novartis’s prior animal-health product production disruption had negatively affected fiscal 2013 sales; partial distribution resumed during the quarter ended June 30, 2013.
- The quarterly and nine-month effective tax rates benefited from a one-time fiscal 2013 income-tax over-accrual adjustment, compared with a prior-year one-time under-accrual charge.
- The company has previously settled complaints with state regulatory boards and cautioned that additional state actions could occur. It also initiates litigation to protect its trademarks, with no assurance of success.
- Management stated that disclosure controls and procedures were effective and that no significant changes affected internal control over financial reporting.
Investor Verification Checklist
- Verify whether reorder-driven growth can offset declining new-customer acquisition and new-order sales.
- Monitor gross margin for continued effects from product costs and promotional discounts.
- Assess operating cash-flow conversion, particularly changes in accounts payable, prepaid expenses, and inventory.
- Confirm the sustainability of the $0.17-per-share dividend and the intended use of the remaining share-repurchase authorization.
- Evaluate exposure to seasonal demand, price competition, advertising efficiency, and customer-acquisition costs.
- Review state regulatory matters, trademark litigation, and any developments involving product availability.
- Confirm that the deferred capital-expenditure plan and projected fiscal 2014 tax rate remain achievable.