PetMed Express, Inc. Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2012. The request metadata references “2011 Q4,” but the supplied filing is the fiscal 2012 annual report, including the quarter ended March 31, 2012.
Business Context
PetMed Express, 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. Approximately 75% of fiscal 2012 sales were generated through the Internet, compared with 71% in fiscal 2011. The company attracted approximately 722,000 new customers and operated with approximately 2.7 million customers purchasing within the prior two years.
- Approximately 1,200 product SKUs.
- Prescription medications represented 40% of sales, up from 38% in fiscal 2011.
- Non-prescription medications and supplies represented 59% of sales, down from 61%.
- Four suppliers accounted for approximately 50% of product purchases.
Financial Performance and Liquidity
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Sales | $238.3 million | $231.6 million | 2.9% increase |
| Gross profit | $80.2 million | $84.0 million | 4.5% decrease |
| Gross margin | 33.7% | 36.2% | 250 basis-point decline |
| Operating income | $26.0 million | $33.0 million | 21.2% decrease |
| Net income | $16.7 million | $20.9 million | 20.2% decrease |
| Diluted EPS | $0.80 | $0.92 | 13.0% decrease |
| Operating cash flow | $20.4 million | $30.1 million | 32.3% decrease |
Advertising expense increased 11.0% to $30.4 million, or 12.8% of sales, compared with 11.8% in fiscal 2011. Cost of sales increased to 66.3% of sales from 63.8%, primarily because of more aggressive pricing and higher product costs. The effective tax rate was 36.8%, compared with 37.3%.
At March 31, 2012, the company reported $46.8 million of cash and cash equivalents, $10.3 million of short-term investments, $78.2 million of working capital, and no debt obligations. Total assets were $91.1 million, total liabilities were $9.9 million, and shareholders’ equity was $81.2 million.
Investing activities provided $11.6 million, primarily reflecting liquidation of long-term investments. Financing activities used $34.9 million, including $23.7 million for repurchases of approximately 2.1 million shares and $11.0 million of dividends paid. Approximately $14.0 million remained available under the repurchase plan at March 31, 2012. Fiscal 2012 capital expenditures were $705,000, and approximately $500,000 was forecast for fiscal 2013.
Material Changes Versus the Prior Comparable Period
- Sales increased modestly, supported by higher new-order and reorder sales. New-order sales increased 8.4%, while reorder sales increased 1.4%.
- Internet sales increased 8.0% to $178.8 million, while contact-center sales declined 10.1% to $59.5 million.
- New customers increased to approximately 722,000 from 645,000, while average order size declined to approximately $76 from $79.
- Gross margin declined because of promotional pricing, more aggressive sales discounts, and higher product costs.
- Advertising spending increased to support customer acquisition and sales growth; customer acquisition cost remained approximately $42.
- Shares outstanding declined following the repurchase and retirement of approximately 2.1 million shares, compared with approximately 791,000 shares in fiscal 2011.
- The company liquidated its entire auction rate securities balance and received full par value, resulting in a $110,000 recovery in other comprehensive income.
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 2013.
- Management planned to continue aggressive advertising and pricing, expand pet-supply and generic offerings, and pursue direct supplier relationships.
- Novartis halted production of Sentinel, Interceptor, Program, Deramaxx, and Clomicalm in January 2012. The company stated that the disruption negatively affected sales and could continue to do so.
- Key risks include competition from veterinarians and retailers, pressure on pricing and margins, reliance on third-party distributors, supplier concentration, inventory management, prescription authorization and pharmacy licensing requirements, and seasonal demand.
- Approximately 50% of sales were generated from customers in eight states, increasing exposure to state licensing or regulatory actions.
- The company operates its headquarters, fulfillment center, pharmacy, and customer-service operations from one South Florida location, creating business-interruption and hurricane exposure.
- Routine litigation and pharmacy-board complaints remain possible. A patent-infringement lawsuit was dismissed in May 2012 after the company entered into a licensing agreement for a confidential amount.
- Future dividends are discretionary. A $0.15-per-share dividend declared on May 4, 2012 was paid on May 25, 2012.
- Management and McGladrey LLP reported effective internal control over financial reporting, and the financial statement audit opinion was unqualified.
Investor Verification Checklist
- Verify the fiscal-period distinction: this filing covers the year ended March 31, 2012, not a standalone calendar fourth quarter of 2011.
- Assess whether pricing and promotional activity can restore sales growth without further gross-margin erosion.
- Monitor the duration and financial impact of the Novartis product-supply disruption.
- Review supplier concentration and the company’s dependence on secondary distributors and non-guaranteed supply arrangements.
- Evaluate pharmacy licensing, prescription-authorization, FDA, EPA, and state regulatory exposure.
- Track cash deployment among share repurchases, dividends, investments, and operating needs.
- Review seasonality, customer acquisition trends, average order value, reorder rates, and the shift toward Internet sales.
- Confirm the resolution and financial terms of the patent litigation licensing agreement, which were not disclosed in the filing text.