PETMED EXPRESS, INC. Executive Summary
PetMed Express was incorporated in the state ofFlorida inJanuary 1996 . The Company's common stock is traded on the NASDAQ Global Select Market under the symbol "PETS." The Company began selling pet medications and other pet health products inSeptember 1996 . InMarch 2010 , the Company started offering for sale additional pet supplies on its website, and these items are drop shipped to customers by third party vendors. Presently, the Company's product line includes approximately 2,500 of the most popular pet medications, health products, and supplies for dogs, cats, and horses. The Company markets its products through national advertising campaigns which aim to increase the recognition of the "1-800-PetMeds " brand name, and "PetMeds" family of trademarks, increase traffic on its website at www.1800petmeds.com, acquire new customers, and maximize repeat purchases. Approximately 84% of all sales were generated via the Internet for both the quarters endedDecember 31, 2019 and 2018. The Company's sales consist of products sold mainly to retail consumers. The three-month average purchase was approximately$85 and$84 per order for the quarters endedDecember 31, 2019 and 2018, respectively, and for the nine months endedDecember 31, 2019 and 2018, the average purchase was approximately$86 and$87 per order, respectively.
Critical Accounting Policies
Our discussion and analysis of our financial condition and the results of our operations contained herein are based upon our Condensed Consolidated Financial Statements and the data used to prepare them. The Company's Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted inthe United States of America . On an ongoing basis we re-evaluate our judgments and estimates including those related to product returns, bad debts, inventories, and income taxes. We base our estimates and judgments on our historical experience, knowledge of current conditions, and our beliefs of what could occur in the future considering available information. Actual results may differ from these estimates under different assumptions or conditions. Our estimates are guided by observing the following critical accounting policies. Revenue recognition The Company generates revenue by selling pet medication products and pet supplies mainly to retail customers. Certain pet supplies offered on the Company's website are drop shipped to customers. The Company considers itself the principal in the arrangement because the Company controls the specified good before it is transferred to the customer. Revenue contracts contain one performance obligation, which is delivery of the product; customer care and support is deemed not to be a material right to the contract. The transaction price is adjusted at the date of sale for any applicable sales discounts and an estimate of product returns, which are estimated based on historical patterns; however this is not considered a key judgment. There are no amounts excluded from variable consideration. Revenue is recognized when control transfers to the customer at the point in time in which shipment of the product occurs. This key judgment is determined as the shipping point represents the point in time in which the Company has a present right to payment, title has transferred to the customer, and the customer has assumed the risks and rewards of ownership. Outbound shipping and handling fees are an accounting policy election, and are included in sales as the Company considers itself the principal in the arrangement given responsibility for supplier selection and discretion over pricing. Shipping costs associated with outbound freight after control over a product has transferred to a customer are an accounting policy election and are accounted for as fulfillment costs and are included in cost of sales. The majority of the Company's sales are paid by credit cards and the Company usually receives the cash settlement in two to three banking days. Credit card sales minimize accounts receivable balances relative to sales. The Company maintains an allowance for doubtful accounts for losses that the Company estimates will arise from customers' inability to make required payments, arising from either credit card charge-backs or insufficient funds checks. The Company determines its estimates of the uncollectibility of accounts receivable by analyzing historical bad debts and current economic trends. The allowance for doubtful accounts was approximately$31,000 atDecember 31, 2019 compared to$39,000 atMarch 31, 2019 . 10 --------------------------------------------------------------------------------
Valuation of inventory Inventories consist of prescription and non-prescription pet medications and pet supplies that are available for sale and are priced at the lower of cost or net realizable value using a weighted average cost method. The Company writes down its inventory for estimated obsolescence. The inventory reserve was approximately$61,000 atDecember 31, 2019 compared to$54,000 atMarch 31, 2019 . Advertising The Company's advertising expense consists primarily of Internet marketing, direct mail/print, and television advertising. Internet costs are expensed in the month incurred and direct mail/print advertising costs are expensed when the related catalogs, brochures, and postcards are produced, distributed, or superseded. Television advertising costs are expensed as the advertisements are televised. Accounting for income taxes The Company accounts for income taxes under the provisions of ASC Topic 740 ("Accounting for Income Taxes"), which generally requires recognition of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in the Consolidated Financial Statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting carrying values and the tax bases of assets and liabilities, and are measured by applying enacted tax rates and laws for the taxable years in which those differences are expected to reverse. Results of Operations
The following should be read in conjunction with the Company's Condensed Consolidated Financial Statements and the related notes thereto included elsewhere herein. The following table sets forth, as a percentage of sales, certain operating data appearing in the Company's Condensed Consolidated Statements of Comprehensive Income:
Three Months Ended Nine Months Ended
December 31, December 31,
2019 2018 2019 2018
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 70.5 67.7 71.6 65.9
Gross profit 29.5 32.3 28.4 34.1
Operating expenses:
General and administrative 10.1 9.6 9.0 8.7
Advertising 5.3 6.0 7.9 7.1
Depreciation 0.9 0.9 0.8 0.8
Total operating expenses 16.3 16.5 17.7 16.6
Income from operations 13.2 15.8 10.7 17.5
Total other income 1.2 1.2 1.1 1.0
Income before provision for income taxes 14.4 17.0
11.8 18.5
Provision for income taxes 3.0 4.0 2.8 4.3
Net income 11.4 % 13.0 % 9.0 % 14.2 %
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Three Months Ended
Sales Sales were relatively flat at$59.9 million and$60.1 million for the quarters endedDecember 31, 2019 and 2018, respectively. For the nine months endedDecember 31, 2019 , sales decreased by approximately$9.0 million , or 4.1%, to approximately$209.8 million compared to$218.9 million for the nine months endedDecember 31, 2018 . The decrease in sales for the nine months endedDecember 31, 2019 was primarily due to decreased new orders and reorder sales. The Company acquired approximately 76,000 new customers for the quarter endedDecember 31, 2019 , compared to approximately 81,000 new customers for the same period the prior year. For the nine months endedDecember 31, 2019 the Company acquired approximately 313,000 new customers, compared to 366,000 new customers for the nine months endedDecember 31, 2018 . The following chart illustrates sales by various sales classifications: Three Months Ended December 31, Sales (In thousands) 2019 % 2018 % $ Variance % Variance
Reorder Sales$ 53,808 89.8 %$ 53,289 88.7 %$ 519 1.0 % New Order Sales 6,107 10.2 % 6,779 11.3 % (672 ) -9.9 % Total Net Sales$ 59,915 100.0 %$ 60,068 100.0 %$ (153 ) -0.3 % Internet Sales$ 50,000 83.5 %$ 50,701 84.4 %$ (701 ) -1.4 % Contact Center Sales 9,915 16.5 % 9,367 15.6 % 548 5.9 % Total Net Sales$ 59,915 100.0 %$ 60,068 100.0 %$ (153 ) -0.3 % Nine Months Ended December 31, Sales (In thousands) 2019 % 2018 % $ Variance % Variance Reorder Sales$ 183,401 87.4 %$ 185,866 84.9 %$ (2,465 ) -1.3 % New Order Sales 26,438 12.6 % 32,988 15.1 % (6,550 ) -19.9 % Total Net Sales$ 209,839 100.0 %$ 218,854 100.0 %$ (9,015 ) -4.1 % Internet Sales$ 175,476 83.6 %$ 185,320 84.7 %$ (9,844 ) -5.3 % Contact Center Sales 34,363 16.4 % 33,534 15.3 % 829 2.5 % Total Net Sales$ 209,839 100.0 %$ 218,854 100.0 %$ (9,015 ) -4.1 % Going forward sales may be adversely affected due to increased competition and consumers giving more consideration to price. No guarantees can be made that sales will grow in the future. The majority of our product sales are affected by the seasons, due to the seasonality of mainly heartworm, and flea and tick medications. For the quarters endedJune 30 ,September 30 ,December 31 , andMarch 31 of Fiscal 2019, the Company's sales were approximately 31%, 25%, 21%, and 23%, respectively. Cost of sales Cost of sales increased by approximately$1.5 million , or 3.8%, to approximately$42.2 million for the quarter endedDecember 31, 2019 , from approximately$40.7 million for the quarter endedDecember 31, 2018 . For the nine months endedDecember 31, 2019 , cost of sales increased by approximately$6.0 million , or 4.2%, to approximately$150.3 million compared to$144.3 million for the same period in the prior year. Cost of sales as a percent of sales was 70.5% and 67.7% for the quarters endedDecember 31, 2019 and 2018, respectively, and for the nine months endedDecember 31, 2019 and 2018 the cost of sales was 71.6% and 65.9%, respectively. The cost of sales increases and percentage increases can be attributed to price reductions given to customers to stimulate sales in response to increased online competition, and an increase to product costs during the quarter and nine months endedDecember 31, 2019 . One of our long-term strategic initiatives and primary purchasing goals has always been to have direct purchasing relationships with the major manufacturers. We now have direct relationships with all major manufacturers. 12 --------------------------------------------------------------------------------
Gross profit Gross profit decreased by approximately$1.7 million , or 8.7%, to approximately$17.7 million for the quarter endedDecember 31, 2019 , from approximately$19.4 million for the quarter endedDecember 31, 2018 . For the nine months endedDecember 31, 2019 gross profit decreased by approximately$15.0 million , or 20%, to approximately$59.6 million , compared to$74.6 million for the same period in the prior year. The decrease in gross profit for the quarter and nine months endedDecember 31, 2019 is directly related to a decrease in sales and price reductions. Gross profit as a percentage of sales was 29.5% and 32.3% for the three months endedDecember 31, 2019 and 2018, respectively, and for the nine months endedDecember 31, 2019 and 2018, gross profit was 28.4% and 34.1%, respectively. The gross profit percentage decreases for the quarter and nine months endedDecember 31, 2019 can be mainly attributed to price reductions given to customers to stimulate sales in response to increased online competition, and an increase to product costs during the quarter and nine months. We now have direct relationships with all major manufacturers and these manufacturers have minimum advertised price policies which should cause a general price discipline in the online market. Over the past three sequential quarters gross margin percentages have increased from 27.3% inJune 2019 , to 28.6% inSeptember 2019 , and to 29.5% inDecember 2019 .
General and administrative expenses
General and administrative expenses increased by approximately$247,000 , or 4.3%, to approximately$6.0 million for the quarter endedDecember 31, 2019 , compared to$5.8 million for the quarter endedDecember 31, 2018 . The increase in general and administrative expenses for the quarter primarily related to an increase in payroll expenses in the customer care, pharmacy, and information technology departments. General and administrative expenses as a percentage of sales was 10.1% and 9.6% for the quarters endedDecember 31, 2019 and 2018, respectively. General and administrative expenses were relatively flat at approximately$18.9 million for both the nine months endedDecember 31, 2019 and 2018. General and administrative expenses as a percentage of sales was 9.0% and 8.7% for the nine months endedDecember 31, 2019 and 2018, respectively. The percentage increase for the nine months endedDecember 31, 2019 was primarily related to decreased sales in the nine month period. Advertising expenses Advertising expenses decreased by approximately$456,000 , or 12.6%, to approximately$3.2 million for the quarter endedDecember 31, 2019 , from approximately$3.6 million for the quarter endedDecember 31, 2018 . For the nine months endedDecember 31, 2019 , advertising expenses increased by approximately$917,000 , or 5.9%, to approximately$16.5 million compared to advertising expenses of approximately$15.6 million for the nine months endedDecember 31, 2018 . The advertising expenditures for the three and nine months endedDecember 31, 2019 were intended to stimulate sales and acquire new customers. The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, decreased to$42 for the quarter endedDecember 31, 2019 compared to$45 for the quarter endedDecember 31, 2018 . For the nine months endedDecember 31, 2019 and 2018 the advertising costs of acquiring a new customer were$53 and$43 , respectively. The decrease to customer acquisition costs for the quarter endedDecember 31, 2019 can be attributed to reduced advertising expenses compared to the same quarter in the prior year. The increase to customer acquisition costs for the nine months endedDecember 31, 2019 can be attributed to increased advertising costs, primarily television advertising, and a lower-than-expected consumer response in theJune 2019 andSeptember 2019 quarters, which may be attributed to increased online competition. Advertising cost of acquiring a new customer can be impacted by the advertising environment, the effectiveness of our advertising creative, advertising spending, and price competition. Historically, the advertising environment fluctuates due to supply and demand. A more favorable advertising environment may positively impact future sales, whereas a less favorable advertising environment may negatively impact future sales. As a percentage of sales, advertising expense was 5.3% and 6.0% for the quarters endedDecember 31, 2019 and 2018, respectively, and for the nine months endedDecember 31, 2019 and 2018 advertising expense was 7.9% and 7.1%, respectively. The decrease in advertising expense as a percentage of total sales for the quarter endedDecember 31, 2019 can be attributed to decreased advertising expense in the quarter. The increase in advertising expense as a percentage of total sales for the nine months endedDecember 31, 2019 can be attributed to increased television advertising expense in theJune 2019 quarter. The Company currently anticipates advertising as a percentage of sales to be approximately 8.0% for fiscal 2020. However, the advertising percentage will fluctuate quarter to quarter due to seasonality and advertising availability. 13 --------------------------------------------------------------------------------
Depreciation Depreciation expense for the quarter endedDecember 31, 2019 increased slightly by approximately$6,000 to$562,000 compared to$556,000 for the quarter endedDecember 31, 2018 . For both of the nine months endedDecember 31, 2019 and 2018 depreciation expense were approximately$1.7 million . The increases to depreciation expense for the quarter and nine months endedDecember 31, 2019 can be attributed to new property and equipment additions. Other income Other income decreased slightly by approximately$41,000 , to approximately$722,000 for the quarter endedDecember 31, 2019 from approximately$763,000 for the quarter endedDecember 31, 2018 . For the nine months endedDecember 31, 2019 other income increased by approximately$167,000 , to approximately$2.3 million compared to approximately$2.1 million for the same period in the prior year. The decrease to other income for the quarter endedDecember 31, 2019 was primarily related to decreased interest income due to decreased interest rates compared to the prior year. The increase to other income for the nine months endedDecember 31, 2019 was primarily related to increased interest income due to higher interest rates in the June and September quarters. Interest income may decrease in the future as the Company utilizes its cash balances on its share repurchase plan, with approximately$28.7 million remaining as ofDecember 31, 2019 , on any quarterly dividend payment, on its operating activities, or with further decreases in interest rates. Provision for income taxes For the quarters endedDecember 31, 2019 and 2018, the Company recorded an income tax provision of approximately$1.8 million and$2.4 million , respectively, and for the nine months endedDecember 31, 2019 and 2018, the Company recorded an income tax provision of approximately$5.9 million and$9.4 million , respectively. The effective tax rate for the quarter endedDecember 31, 2019 was approximately 21.0% compared to 23.5% for the quarter endedDecember 31, 2018 , and the effective tax rate for the nine months endedDecember 31, 2019 was approximately 23.9%, compared to 23.2% for the nine months endedDecember 31, 2018 . The decrease to the income tax provision and effective rate for the quarter endedDecember 31, 2019 was due to a reduction in theFlorida state corporate income tax rate, and a one-time income tax benefit of$96,000 related to the reconciliation of the Company's tax return for the fiscal year endingMarch 31, 2019 . The increase to the effective rate for the nine months endedDecember 31, 2019 can be attributed to a$322,000 income tax charge related to restricted stock compensation which was recognized inSeptember 2019 .
Liquidity and Capital Resources
The Company's working capital atDecember 31, 2019 andMarch 31, 2019 was$102.0 million and$107.8 million , respectively. The$5.8 million decrease in working capital was primarily attributable to the share buyback and dividends paid in the period, offset by cash flow generated from operations. Net cash provided by operating activities was$21.6 million and$32.0 million for the nine months endedDecember 31, 2019 and 2018, respectively. This change can be mainly attributed to a decrease in the Company's net income for the nine months endedDecember 31, 2019 . Net cash used in investing activities increased to$1.8 million for the nine months endedDecember 31, 2019 , compared to net cash used in investing activities of$507,000 for the nine months endedDecember 31, 2018 . The increase in investing activities relates to increased asset additions during the period. Net cash used in financing activities was$27.9 million for the nine months endedDecember 31, 2019 , compared to$16.3 million for the same period in the prior year. The increase to financing activities relates to the Company purchasing approximately 613,000 shares of its common stock for approximately$11.5 million during the June quarter and the remaining increase to financing activities related to an increase in the dividend paid in the nine months endedDecember 31, 2019 . AtDecember 31, 2019 , the Company had approximately$28.7 million remaining under the Company's share repurchase plan. Subsequent toDecember 31, 2019 , onJanuary 21, 2020 our Board of Directors declared a quarterly dividend of$0.27 per share. The Board established aFebruary 3, 2020 record date and aFebruary 14, 2020 payment date. Depending on future market conditions the Company may utilize its cash and cash equivalents on the remaining balance of its current share repurchase plan, on dividends, or on its operating activities. 14 -------------------------------------------------------------------------------- AtDecember 31, 2019 , the Company had no material outstanding lease commitments. See Note 1, Recent Accounting Pronouncements, to the Condensed Consolidated Financial Statements within this Form 10-Q for the Company's disclosure related to leases. We are not currently bound by any long or short term agreements for the purchase or lease of capital expenditures. Any material amounts expended for capital expenditures would be the result of an increase in the capacity needed to adequately provide for any increase in our business. To date we have paid for any needed additions to our capital equipment infrastructure from working capital funds and anticipate this being the case in the future. Presently, we have approximately$3.3 million forecasted for capital expenditures for the remainder of fiscal 2020, the majority of which will be invested in our e-commerce platform to better service our customers, which will be funded through cash from operations. The Company's primary source of working capital is cash from operations. The Company presently has no need for alternative sources of working capital, and has no commitments or plans to obtain additional capital.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements at
Cautionary Statement Regarding Forward-Looking Information
Certain information in this Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the words "believes," "intends," "expects," "may," "will," "should," "plans," "projects," "contemplates," "intends," "budgets," "predicts," "estimates," "anticipates," or similar expressions. These statements are based on our beliefs, as well as assumptions we have used based upon information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties, and assumptions. Actual future results may differ significantly from the results discussed in the forward-looking statements. A reader, whether investing in our common stock or not, should not place undue reliance on these forward-looking statements, which apply only as of the date of this quarterly report. When used in this quarterly report on Form 10-Q, "PetMed Express ," "1-800-PetMeds ," "PetMeds ," "PetMed," "PetMeds.com," "1800PetMeds.com," "PetMed.com," "PetMed Express.com," "the Company," "we," "our," and "us" refers toPetMed Express, Inc. and our subsidiaries.
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