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PETS > SEC Filings for PETS > Form 10-Q on 29-Oct-2013All Recent SEC Filings

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Form 10-Q for PETMED EXPRESS INC


29-Oct-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Executive Summary

PetMed Express was incorporated in the state of Florida in January 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 in September 1996. In March 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 3,000 of the most popular pet medications, health products, and supplies for dogs and cats.

The Company markets its products through national television, online, and direct mail/print 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 79% of all sales were generated via the Internet for the quarter ended September 30, 2013, compared to 77% for the quarter ended September 30, 2012. The Company's sales consist of products sold mainly to retail consumers. The three-month average purchase was approximately $73 and $72 per order for the quarters ended September 30, 2013 and 2012, respectively, and the six-month average purchase was approximately $75 and $73 per order for the periods ended September 30, 2013 and 2012, respectively.

Critical Accounting Policies

Our discussion and analysis of our financial condition and the results of our operations 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 in the 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 primarily to retail consumers. The Company's policy is to recognize revenue from product sales upon shipment, when the rights of ownership and risk of loss have passed to the customer. Outbound shipping and handling fees are included in sales and are billed upon shipment. Shipping expenses 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 $5,000 at September 30, 2013 and March 31, 2013.

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 market value using a weighted average cost method. The Company writes down its inventory for estimated obsolescence. The inventory reserve was approximately $43,000 at September 30, 2013 compared to $79,000 at March 31, 2013.

Advertising

The Company's advertising expense consists primarily of television advertising, Internet marketing, and direct mail/print advertising. Television advertising costs are expensed as the advertisements are televised. 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.

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          Six Months Ended
                                                 September 30,              September 30,
                                               2013          2012         2013         2012

 Sales                                           100.0 %      100.0 %       100.0 %     100.0 %
 Cost of sales                                    68.2         66.7          67.9        67.2

 Gross profit                                     31.8         33.3          32.1        32.8

 Operating expenses:
   General and administrative                      9.1          9.2           8.4         8.9
   Advertising                                    11.5         12.8          12.9        13.6
   Depreciation                                    0.4          0.4           0.4         0.4
 Total operating expenses                         21.0         22.4          21.7        22.9

 Income from operations                           10.8         10.9          10.4         9.9

 Total other income                                0.1          0.1           0.1         0.1

 Income before provision for income taxes         10.9         11.0          10.5        10.0

 Provision for income taxes                        4.0          4.1           3.9         3.7

 Net income                                        6.9 %        6.9 %         6.6 %       6.3 %

Three Months Ended September 30, 2013 Compared With Three Months Ended September 30, 2012, and Six Months Ended September 30, 2013 Compared With Six Months Ended September 30, 2012

Sales

Sales increased by approximately $2.4 million, or 4.0%, to approximately $60.5 million for the quarter ended September 30, 2013, from approximately $58.1 million for the quarter ended September 30, 2012. For the six months ended September 30, 2013, sales increased by approximately $7.6 million, or 6.0%, to approximately $134.7 million compared to $127.1 million for the six months ended September 30, 2012. The increase in sales for the three and six months ended September 30, 2013 was primarily due to increased reorder sales, with new order sales increasing for the six months ended September 30, 2013 . Our sales increase was also due to a rise in the average order size during the three and six months ended September 30, 2013. The Company acquired approximately 169,000 new customers for the quarter ended September 30, 2013, compared to approximately 177,000 new customers for the same period the prior year. For the six months ended September 30, 2013 the Company acquired approximately 376,000 new customers, compared to 374,000 new customers for the six months ended September 30, 2012. The following chart illustrates sales by various sales classifications:

                             Three Months Ended September 30,
Sales (In thousands)     2013          %          2012          %         $ Variance      % Variance

Reorder Sales          $ 48,886        80.8 %   $ 46,427        79.8 %   $      2,459             5.3 %
New Order Sales        $ 11,593        19.2 %   $ 11,718        20.2 %   $       (125 )          -1.1 %

Total Net Sales        $ 60,479       100.0 %   $ 58,145       100.0 %   $      2,334             4.0 %

Internet Sales         $ 47,872        79.2 %   $ 44,598        76.7 %   $      3,274             7.3 %
Contact Center Sales   $ 12,607        20.8 %   $ 13,547        23.3 %   $       (940 )          -6.9 %

Total Net Sales        $ 60,479       100.0 %   $ 58,145       100.0 %   $      2,334             4.0 %



                                  Six Months Ended September 30,
Sales (In thousands)      2013            %           2012            %          $ Variance      % Variance

Reorder Sales           $ 107,855          80.1 %   $ 101,488          79.8 %   $      6,367             6.3 %
New Order Sales         $  26,818          19.9 %   $  25,612          20.2 %   $      1,206             4.7 %

Total Net Sales         $ 134,673         100.0 %   $ 127,100         100.0 %   $      7,573             6.0 %

Internet Sales          $ 106,237          78.9 %   $  97,391          76.6 %   $      8,846             9.1 %
Contact Center Sales    $  28,436          21.1 %   $  29,709          23.4 %   $     (1,273 )          -4.3 %

Total Net Sales         $ 134,673         100.0 %   $ 127,100         100.0 %   $      7,573             6.0 %

Sales may be adversely affected in Fiscal 2014 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 ended June 30, September 30, December 31, and March 31 of Fiscal 2013, the Company's sales were approximately 30%, 26%, 22%, and 22%, respectively.

In January 2012, the manufacturer Novartis Consumer Health, Inc. ("Novartis") announced that it halted production of their animal health products. This disruption in production negatively impacted the Company's sales during Fiscal 2013. During the quarter ended June 30, 2013, Novartis started to distribute some of their brands, which might have positively impacted the current quarter and the six months ended September 30, 2013.

Cost of sales

Cost of sales increased by approximately $2.4 million, or 6.3%, to approximately $41.2 million for the quarter ended September 30, 2013, from approximately $38.8 million for the quarter ended September 30, 2012. For the six months ended September 30, 2013, cost of sales increased by approximately $6.0 million, or 7.0%, to approximately $91.4 million compared to $85.4 million for the same period in the prior year. Cost of sales as a percent of sales was 68.2% and 66.7% for the quarters ended September 30, 2013 and 2012, respectively, and for the six months ended September 30, 2013 and 2012 the cost of sales was 67.9% and 67.2%, respectively. The increase to cost of sales as a percentage of sales for the quarter and six months ended September 30, 2013 can be mainly related to increased product costs.

Gross profit

Gross profit decreased by approximately $118,000, or 0.6%, to approximately $19.3 million for the quarter ended September 30, 2013, from approximately $19.4 million for the quarter ended September 30, 2012. For the six months ended September 30, 2013 gross profit increased by approximately $1.6 million, or 3.8%, to approximately $43.3 million, compared to $41.7 million for the same period in the prior year. Gross profit as a percentage of sales was 31.8% and 33.3% for the three months ended September 30, 2013 and 2012, respectively, and for the six months ended September 30, 2013 and 2012, gross profit was 32.1% and 32.8%, respectively. The gross profit percentage decreases can be mainly attributed to an increase to product costs and an increase in promotional discounts.

General and administrative expenses

General and administrative expenses increased by approximately $134,000, or 2.5%, to approximately $5.5 million for the quarter ended September 30, 2013, from approximately $5.4 million for the quarter ended September 30, 2012. For the six months ended September 30, 2013, general and administrative expenses increased by approximately $85,000, or 0.8%, to approximately $11.4 million from approximately $11.3 million for the six months ended September 30, 2012. The increase in general and administrative expenses for the three months ended September 30, 2013 was primarily due to the following: a $68,000 increase in bank service fees due to an increase in sales; a $46,000 increase in payroll expenses related primarily to an increase in sales; a $46,000 increase in professional fees, with the majority of the increase relating to legal and accounting fees; and an $11,000 net increase in other expenses primarily related to bad debt and insurance expenses. Offsetting the increase was a $20,000 decrease in telephone expense and a $17,000 decrease to licenses and fees. The increase in general and administrative expenses for the six months ended September 30, 2013 was primarily due to the following: a $175,000 increase in bank service fees due to an increase in sales; a $36,000 increase in professional fees, with the majority of the increase relating to legal and accounting fees; and a $32,000 net increase in other expenses primarily related to bad debt, travel, and insurance expenses. Offsetting the increase was an $114,000 decrease in payroll expenses, primarily related to a reduction in stock based compensation; a $27,000 decrease in office related expenses; and a $17,000 decrease in telephone expenses.

Advertising expenses

Advertising expenses decreased by approximately $439,000, or 5.9%, to approximately $7.0 million for the quarter ended September 30, 2013, from approximately $7.4 million for the quarter ended September 30, 2012. For the six months ended September 30, 2013, advertising expenses increased by approximately $106,000, or 0.6%, to approximately $17.4 million compared to advertising expenses of approximately $17.3 million for the six months ended September 30, 2012. The decrease in advertising expenses for the three months ended September 30, 2013 can be attributed to a reduction in television and online advertising. The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, decreased to $41 for the quarter ended September 30, 2013, compared to $42 for the quarter ended September 30, 2012. For the six months ended September 30, 2013 and 2012 the advertising costs of acquiring a new customer was $46. Advertising cost of acquiring a new customer can be impacted by the advertising environment, the effectiveness of our advertising creative, increased advertising spending, and price competition. Historically, the advertising environment fluctuates due to supply and demand. A more favorable advertising environment may positively impact future new order sales, whereas a less favorable advertising environment may negatively impact future new order sales.

As a percentage of sales, advertising expense was 11.5% and 12.8% for the quarters ended September 30, 2013 and 2012, respectively, and for the six months ended September 30, 2013 and 2012 advertising expense was 12.9% and 13.6%, respectively. The decrease in advertising expense as a percentage of total sales for the quarter ended September 30, 2013 can be attributed to a reduction in advertising expenses in the quarter. The Company currently anticipates advertising as a percentage of sales to range between approximately 12% and 13% for Fiscal 2014. However, the advertising percentage will fluctuate quarter to quarter due to seasonality and advertising availability. For the fiscal year ended March 31, 2013, quarterly advertising expenses as a percentage of sales ranged between 9% and 14%.

Depreciation

Depreciation expenses decreased by approximately $19,000 to approximately $230,000 for the quarter ended September 30, 2013, from approximately $249,000 for the quarter ended September 30, 2012. For the six months ended September 30, 2013 depreciation expenses decreased by approximately $99,000 to $478,000 compared to $577,000 for the same period in the prior year. The decrease to depreciation expense for the quarter and six months ended September 30, 2013 can be attributed to a reduction in new property and equipment additions, and an increase in fully depreciated fixed assets.

Other income

Other income decreased by approximately $15,000 to approximately $49,000 for the quarter ended September 30, 2013 from approximately $64,000 for the quarter ended September 30, 2012. For the six months ended September 30, 2013 other income decreased by approximately $29,000 to approximately $94,000 compared to approximately $123,000 for the same period in the prior year. The decrease to other income can be primarily attributed to decreased interest income. Interest income may decrease in the future as the Company utilizes its cash balances on its share repurchase plan, with approximately $10.2 million remaining as of September 30, 2013, on any quarterly dividend payment, or on its operating activities.

Provision for income taxes

For both of the quarters ended September 30, 2013 and 2012, the Company recorded an income tax provision of approximately $2.4 million, and for the six months ended September 30, 2013 and 2012, the Company recorded an income tax provision of approximately $5.2 million and $4.7 million, respectively. The effective tax rate for both of the quarters and six months ended September 30, 2013 and 2012 was 36.9%. The Company estimates its effective tax rate will be approximately 37.0% for Fiscal 2014.

Liquidity and Capital Resources

The Company's working capital at September 30, 2013 and March 31, 2013 was $64.8 million and $61.2 million, respectively. The $3.6 million increase in working capital was primarily attributable to cash flow generated from operations, offset by dividends paid. Net cash provided by operating activities was $24.4 million and $15.7 million for the six months ended September 30, 2013 and 2012, respectively. This change can be attributed to a greater decrease in the Company's inventory balance and a greater increase in the Company's accounts payable balance and an increase to net income, compared to the same period in the prior year. Net cash used in investing activities was $72,000 for the six months ended September 30, 2013, compared to net cash used in investing activities of $5.3 million for the six months ended September 30, 2012. This change can be mainly attributed to the purchasing of the Company's short term investments during the six months ended September 30, 2012, compared to no investment purchases during the six months ended September 30, 2013. Net cash used in financing activities was $6.5 million for the six months ended September 30, 2013, compared to $10.2 million for the same period in the prior year. This change was primarily due to the Company repurchasing approximately 397,000 shares of its common stock for approximately $3.9 million for the six months ended September 30, 2012, compared to no stock repurchases during the six months ended September 30, 2013. During the six months ended September 30, 2013 the Company paid approximately $6.5 million in dividends, compared to $6.1 million in dividends for the same period in the prior year.

As of September 30, 2013 the Company had approximately $10.2 million remaining under the Company's share repurchase plan. Subsequent to September 30, 2013, on October 25, 2013 our Board of Directors declared a $0.17 per share dividend. The Board established a November 8, 2013 record date and a November 22, 2013 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. As of September 30, 2013 the Company had no outstanding lease commitments except for the lease for its 65,300 square foot facility. We are not currently bound by any long or short term agreements for the purchase or lease of capital expenditures. Any 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 $2.0 million forecasted for capital expenditures for the remainder of Fiscal 2014, 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 as of September 30, 2013.

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,""PetMed.com,""PetMed Express.com," "the Company," "we," "our," and "us" refers to PetMed Express, Inc. and our subsidiaries.

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