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PETS > SEC Filings for PETS > Form 10-K on 27-May-2014All Recent SEC Filings

Show all filings for PETMED EXPRESS INC

Form 10-K for PETMED EXPRESS INC


27-May-2014

Annual Report


ITEM 7. 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 in fiscal 2014, compared to 77% in fiscal 2013. The Company's sales consist of products sold mainly to retail consumers. The twelve-month average purchase was approximately $75 and $73 per order for the fiscal years ended March 31, 2014 and 2013, respectively.

Critical Accounting Policies

Our discussion and analysis of our financial condition and the results of our operations are based upon our Consolidated Financial Statements and the data used to prepare them. The Company's 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 $7,000 at March 31, 2014, compared to $5,000 at 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 $90,000 and $79,000 as of March 31, 2014 and 2013, respectively.

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 the 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 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 Consolidated Statements of Comprehensive Income:

                                                    Fiscal Year Ended March 31,

                                                   2014           2013        2012

     Sales                                           100.0 %       100.0 %     100.0 %
     Cost of sales                                    66.7          66.1        66.3

     Gross profit                                     33.3          33.9        33.7

     Operating expenses:
     General and administrative                        9.2           9.5         9.4
     Advertising                                      11.6          12.0        12.8
     Depreciation                                      0.4           0.5         0.6
     Total operating expenses                         21.2          22.0        22.8

     Income from operations                           12.1          11.9        10.9

     Total other income                                0.1           0.1         0.2

     Income before provision for income taxes         12.2          12.0        11.1

     Provision for income taxes                        4.5           4.5         4.1

     Net income                                        7.7 %         7.5 %       7.0 %

Fiscal 2014 Compared to Fiscal 2013

Sales

Sales increased by approximately $5.6 million, or 2.4%, to approximately $233.4 million for the fiscal year ended March 31, 2014, from approximately $227.8 million for the fiscal year ended March 31, 2013. The increase in sales for the fiscal year ended March 31, 2014 can be attributed to increased reorder sales, offset by a reduction to new order sales. Our sales increase was also due to an increase in the average order size during the year. The Company acquired approximately 597,000 new customers for the year ended March 31, 2014, compared to approximately 630,000 new customers for the same period the prior year.

The following chart illustrates sales by various sales classifications:

Sales (In thousands)      2014            %           2013            %          $ Variance      % Variance

Reorder Sales           $ 191,205          81.9 %   $ 184,814          81.1 %   $      6,391             3.5 %
New Order Sales         $  42,186          18.1 %   $  43,015          18.9 %   $       (829 )          -1.9 %
Total Net Sales         $ 233,391         100.0 %   $ 227,829         100.0 %   $      5,562             2.4 %
Internet Sales          $ 184,356          79.0 %   $ 175,984          77.2 %   $      8,372             4.8 %
Contact Center Sales    $  49,035          21.0 %   $  51,845          22.8 %   $     (2,810 )          -5.4 %
Total Net Sales         $ 233,391         100.0 %   $ 227,829         100.0 %   $      5,562             2.4 %

Future 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 were 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 2014, the Company's sales were approximately 32%, 26%, 21%, and 21%, respectively. 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. Sales in the March quarter of fiscal 2014 were negatively impacted by the colder-than-normal weather.

Cost of sales

Cost of sales increased by $5.1 million, or 3.4%, to $155.8 million for the fiscal year ended March 31, 2014, from $150.7 million for the fiscal year ended March 31, 2013. The increase in cost of sales is directly related to increased sales. As a percentage of sales, cost of sales was 66.7% in fiscal 2014, as compared to 66.1% in fiscal 2013. The cost of sales percentage increase can be mainly attributed to an increase in product costs and an increase in promotional discounts.

Gross profit

Gross profit increased by $496,000, to $77.6 million for the fiscal year ended March 31, 2014, from $77.1 million for the fiscal year ended March 31, 2013. Gross profit as a percentage of sales for fiscal 2014 was 33.3% compared to 33.9%, for fiscal 2013. The gross profit percentage decrease can be mainly attributed to an increase in product costs and an increase in promotional discounts.

General and administrative expenses

General and administrative expenses decreased by $240,000, or 1.1%, to $21.4 million for the fiscal year ended March 31, 2014 from $21.6 million for the fiscal year ended March 31, 2013. The decrease in general and administrative expenses for the fiscal year ended March 31, 2014 was primarily due to the following: a $331,000 reduction in payroll expense primarily related to a reduction in stock based compensation; a $67,000 decrease in office expenses; a $37,000 decrease in licenses and fees; and a $36,000 decrease in telephone expenses. Offsetting the decrease was a $155,000 increase in bank service fees due to increased sales; a $40,000 increase in bad debt expense; and a $36,000 net increase in other expenses including professional fees and travel expense. General and administrative expenses as a percentage of sales was 9.2% compared to 9.5% for the fiscal years ended March 31, 2014 and 2013, respectively. The decrease in general and administrative expenses as a percentage of sales can mainly be attributed to an increase in sales in fiscal 2014.

Advertising expenses

Advertising expenses decreased by approximately $253,000 to approximately $27.2 million for the year ended March 31, 2014, from approximately $27.4 million for the year ended March 31, 2013. The decrease in advertising expenses for fiscal 2014 can be attributed to a reduction in print advertising. The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, was $46 for the fiscal year ended March 31, 2014, compared to $44 for the fiscal year ended March 31, 2013.

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 11.6 % and 12.0% for the fiscal years ended March 31, 2014 and 2013, respectively. The decrease in advertising expense as a percentage of total sales for the fiscal year ended March 31, 2014 can be attributed to increased sales and a reduction in advertising expense. The Company currently anticipates advertising as a percentage of sales to be approximately 12% for fiscal 2015. However, the advertising percentage will fluctuate quarter to quarter due to seasonality and advertising availability. For the fiscal year ended March 31, 2014, quarterly advertising expenses as a percentage of sales ranged between 9% and 14%.

Depreciation

Depreciation decreased by approximately $224,000, to approximately $867,000 for the year ended March 31, 2014, from approximately $1.1 million for the year ended March 31, 2013. This decrease to depreciation for the year ended March 31, 2014 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 $120,000, to approximately $181,000 for the year ended March 31, 2014 from approximately $301,000 for the year ended March 31, 2013. The decrease to other income for the year ended March 31, 2014 can be 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 March 31, 2014, on any quarterly dividend payment, or on its operating activities.

Provision for income taxes

For the fiscal years ended March 31, 2014 and 2013, the Company recorded an income tax provision for approximately $10.4 million and $10.1 million, respectively. The effective tax rate for the fiscal years ended March 31, 2014 and 2013 were 36.7% and 37.1%, respectively. The effective tax rate decrease for the fiscal year ended March 31, 2014, was due to a one-time benefit related to a fiscal 2013 income tax over-accrual, which was recognized in fiscal 2014, compared to a one-time charge related to a fiscal 2012 income tax under-accrual, which was recognized in fiscal 2013. The Company estimates its effective tax rate will be approximately 37.0% for fiscal 2015.

Net income

Net income increased by approximately $807,000, or 4.7%, to approximately $18.0 million for the fiscal year ended March 31, 2014 from approximately $17.2 million for the fiscal year ended March 31, 2013. The increase was primarily due to an increase in sales and a decrease in operating expenses in fiscal 2014.

Fiscal 2013 Compared to Fiscal 2012

Sales

Sales decreased by approximately $10.5 million, or 4.4%, to approximately $227.8 million for the fiscal year ended March 31, 2013, from approximately $238.3 million for the fiscal year ended March 31, 2012. The reduction in sales for the fiscal year ended March 31, 2013 can be attributed to a reduction in new order sales, due to reduced advertising spending, and reorder sales. Our sales were negatively impacted because of the unavailability of Novartis brands during the year due to the manufacturer's suspended production. Our sales were also down because of a decline in average order size, which was due to a change in product mix to lower priced items, including generics, additional discounts given, and increased competition. The Company acquired approximately 630,000 new customers for the year ended March 31, 2013, compared to approximately 722,000 new customers for the same period the prior year.

The following chart illustrates sales by various sales classifications:

                                             Year Ended March 31,
Sales (In thousands)      2013            %           2012            %          $ Variance       % Variance

Reorder Sales           $ 184,814          81.1 %   $ 186,991          78.5 %   $     (2,177 )           -1.2 %
New Order Sales         $  43,015          18.9 %   $  51,259          21.5 %   $     (8,244 )          -16.1 %
Total Net Sales         $ 227,829         100.0 %   $ 238,250         100.0 %   $    (10,421 )           -4.4 %
Internet Sales          $ 175,984          77.2 %   $ 178,758          75.0 %   $     (2,774 )           -1.6 %
Contact Center Sales    $  51,845          22.8 %   $  59,492          25.0 %   $     (7,647 )          -12.9 %
Total Net Sales         $ 227,829         100.0 %   $ 238,250         100.0 %   $    (10,421 )           -4.4 %

Sales may be adversely affected in fiscal 2014 due to increased competition and consumers giving more consideration to price and trading down to less expensive brands, including generics. In response to these trends, the Company will focus on advertising efficiency to improve new order sales and shifting sales to higher margin items, including generics, combined with expanding our product offerings. No guarantees can be made that the Company's efforts will be successful, or that sales will grow in the future. The majority of our product sales were 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. For the quarters ended June 30, September 30, December 31, and March 31 of Fiscal 2012, the Company's sales were approximately 31%, 24%, 21%, and 24%, respectively. Sales in the March quarter of fiscal 2013 were negatively impacted by the colder than normal weather compared to the warmer than normal weather in the March quarter of fiscal 2012.

Cost of sales

Cost of sales decreased by $7.4 million, or 4.7%, to $150.7 million for the fiscal year ended March 31, 2013, from $158.1 million for the fiscal year ended March 31, 2012. The decrease in cost of sales is directly related to decreased sales. As a percentage of sales, cost of sales was 66.1% in fiscal 2013, as compared to 66.3% in fiscal 2012. The cost of sales percentage decrease can be related to a change in product mix to lower cost items, which includes generics.

Gross profit

Gross profit decreased by $3.1 million, or 3.8%, to $77.1 million for the fiscal year ended March 31, 2013, from $80.2 million for the fiscal year ended March 31, 2012. Gross profit as a percentage of sales for fiscal 2013 was 33.9% compared to 33.7%, for fiscal 2012. The gross profit percentage increase can be mainly attributed to a change in product mix to higher margin items, which includes generics.

General and administrative expenses

General and administrative expenses decreased by $771,000, or 3.4%, to $21.6 million for the fiscal year ended March 31, 2013 from $22.4 million for the fiscal year ended March 31, 2012. The decrease in general and administrative expenses for the fiscal year ended March 31, 2013 was primarily due to the following: a $543,000 decrease in bank service fees due to a reduction in credit card fees; a $293,000 reduction in payroll expenses related primarily to a decrease in stock compensation expense; a $147,000 decrease in professional fees, with the majority of the decrease relating to legal and accounting fees; and a $95,000 decrease in telephone expenses. Offsetting the decrease was an $111,000 increase in property expenses related to our website, an $110,000 increase in licenses and fees, and an $86,000 net increase in other expenses including office expense and insurance expense. General and administrative expenses as a percentage of sales was 9.5% compared to 9.4% for the fiscal years ended March 31, 2013 and 2012, respectively. The increase in general and administrative expenses as a percentage of sales can mainly be attributed to a reduction in sales in fiscal 2013.

Advertising expenses

Advertising expenses decreased by approximately $3.0 million, or 9.7%, to approximately $27.4 million for the year ended March 31, 2013, from approximately $30.4 million for the year ended March 31, 2012. The decrease in advertising expenses for fiscal 2013 can be mainly attributed to reduced advertising due to the unavailability of television remnant space inventory. The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, was $44 for the fiscal year ended March 31, 2013, compared to $42 for the fiscal year ended March 31, 2012. 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 12.0 % and 12.8% for the fiscal years ended March 31, 2013 and 2012, respectively. The decrease in advertising expense as a percentage of total sales for the fiscal year ended March 31, 2013 can be attributed to a reduction in advertising expense, due to the unavailability of television remnant space inventory. The Company currently anticipates advertising as a percentage of sales to be approximately 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 decreased by approximately $320,000, to approximately $1.1 million for the year ended March 31, 2013, from approximately $1.4 million for the year ended March 31, 2012. This decrease to depreciation for the year ended March 31, 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 $48,000, to approximately $301,000 for the year ended March 31, 2013 from approximately $349,000 for the year ended March 31, 2012. The decrease to other income for the year ended March 31, 2013 can be attributed to a reduction in advertising 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 March 31, 2013, on any quarterly dividend payment, or on its operating activities.

Provision for income taxes

For the fiscal years ended March 31, 2013 and 2012, the Company recorded an income tax provision for approximately $10.1 million and $9.7 million, respectively. The effective tax rate for the fiscal years ended March 31, 2013 and 2012 were 37.1% and 36.8%, respectively. The effective tax rate increase for the fiscal year ended March 31, 2013, was due to a one-time charge related to a fiscal 2012 income tax under-accrual, which was recognized in the quarter ended December 31, 2012. The Company estimates its effective tax rate will be approximately 37.0% for fiscal 2014.

Net income

Net income increased by approximately $506,000, or 3.0%, to approximately $17.2 million for the fiscal year ended March 31, 2013 from approximately $16.7 million for the fiscal year ended March 31, 2012. The increase was primarily due to a decrease in operating expenses offset by a decrease in gross profit in fiscal 2013.

Liquidity and Capital Resources

The Company's working capital at March 31, 2014 and 2013 was approximately $66.1 million and approximately $59.8 million, respectively. The $6.3 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 $13.5 million and $13.3 million for the fiscal years ended March 31, 2014 and 2013, respectively. Net cash used in investing activities was $129,000 and $5.8 million for the years ended March 31, 2014 and 2013, respectively. This change can be mainly attributed to the purchasing of the Company's short term investments during fiscal 2013, compared to no investments purchased during fiscal 2014. Net cash used in financing activities was $13.2 million and $36.1 million for the years ended March 31, 2014 and 2013, respectively. This change was primarily due to the Company paying $32.0 million in dividends in fiscal 2013, compared to $13.3 million in dividends in fiscal 2014. This change was also due to the Company repurchasing approximately 397,000 shares of its common stock for approximately $3.9 million in fiscal 2013, compared to no stock repurchases in fiscal 2014. As of March 31, 2014 the Company had approximately $10.2 million remaining under the Company's share repurchase plan.

Subsequent to March 31, 2014, the Company's Board of Directors declared a $0.17 per share dividend on May 5, 2014. The Board established a May 16, 2014 record date and a May 23, 2014 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 quarterly dividends, or on its operating activities.

As of both March 31, 2014 and 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 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 $2.8 million forecasted for capital expenditures in fiscal 2015 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 March 31, 2014.

Contractual Obligations and Commitments (In thousands)

                                               Less than                                        More than
                                  Total         1 year         1-2 years       3-5 Years         5 years

Property lease                  $   2,175     $       794     $       796     $       585     $           -
Executive employment contract   $   1,100     $       550     $       550     $         -     $           -

Total obligations               $   3,275     $     1,344     $     1,346     $       585     $           -

Recent Accounting Pronouncements

The Company does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, will have a material effect on the Company's consolidated financial position, results of operations, or cash flows.

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