Overview

Petmed Express (PETS) was founded in Florida in 1996 by Marc Puleo.[6] Puleo was an anesthesiologist who wanted to open a mail-order business for human prescriptions that also sold pet accessories. He shifted his focus to pet medicines due to Merck already heavily controlling the human prescription market. The company initially grew through word of mouth, television commercials, and its catalogs.

Its stock was traded on the OTC Bulletin Board under the symbol PETS from September 1997 until March 2000; in March 2000 the company began the process of becoming listed on the National Quotation Bureau Electronic Quotation Service.¹

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 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 ended December 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 ended December 31, 2019 and 2018, respectively, and for the nine months ended December 31, 2019 and 2018, the average purchase was approximately $86 and $87 per order, respectively.²

Products

The company offer a broad selection of products for dogs and cats. The company's current product line contains approximately 3,000 SKUs of the most popular pet medications, health products, and supplies. These products include a majority of the well-known brands of medication. Generally, its prices are competitive with the prices for medications charged by veterinarians and retailers. The company also offer for sale additional pet supplies on its website, which are drop shipped to its customers by third parties. These pet supplies include: food, beds, crates, stairs, strollers, and other popular pet supplies. The company research new products, and regularly select new products or the latest generation of existing products to become part of its product selection. In addition, the company also refine its current products to respond to changing consumer-purchasing habits. The company's website is designed to give it the flexibility to change featured products or promotions. The company's product line provides customers with a wide variety of selections across the most popular health categories for dogs and cats.³

Customers

Approximately 2.3 million customers have purchased from it within the last two years. The company attracted approximately 467,000 and 521,000 new customers in fiscal 2019 and 2018, respectively. The company's customers are located throughout the United States, with approximately 50% of customers residing in California, Florida, Texas, New York, Pennsylvania, North Carolina, Georgia, and Virginia. The company's primary focus has been on retail customers and the average purchase was approximately $87 for both fiscal 2019 and fiscal 2018.

Operations

Order Processing

The company's website allows customers to easily browse and purchase all of its products online. The company's website is designed to be fast, secure, and easy to use with order and shipping confirmations, and with online order tracking capabilities. The company provide its customers with toll-free telephone access to its customer care representatives. The company's call center generally operates from 7:00 AM to 11:00 PM, Monday through Thursday, 7:00 AM to 9:00 PM on Friday, 9:00 AM to 6:00 PM on Saturday, and 9:00 AM to 5:00 PM on Sunday, Eastern Time. The process of customers purchasing products from 1-800-PetMeds consists of a few simple steps. A customer first places an order online or by calling its toll-free telephone number. The following information is needed to process prescription orders: pet information, prescription information, and the veterinarian’s name and phone number. This information is entered into its computer system. Then its pharmacists and pharmacy technicians verify all prescriptions. The order process system checks for the verification for prescription medication orders and a valid payment method for all orders. Verified orders are then sent to its fulfillment center, where items are picked, and then shipped via United States Postal Service and Federal Express. The company's customers enjoy the convenience of rapid home delivery, with the majority of all orders being shipped within 24 hours of ordering.

Customer Care and Support

The company believe that a high level of customer care and support is critical in retaining and expanding its customer base. Customer care representatives participate in ongoing training programs under the supervision of its training managers. These training sessions include a variety of topics such as product knowledge, computer usage, customer service tips, and the relationship between its Company and veterinarians. The company's customer care representatives respond to customers’ e-mails, calls, and live web chats that are related to products, order status, prices, and shipping. The company believe its customer care representatives are a valuable source of feedback regarding customer satisfaction.

Warehousing and Shipping

The company inventory its products and fill most customer orders from its corporate headquarters in Delray Beach, Florida. Petmed Express has an in-house fulfillment and distribution operation, which is used to manage the entire supply chain, beginning with the placement of the order, continuing through order processing, and then fulfilling and shipping of the product to the customer. The company offer a variety of shipping options, including next day delivery. The company ship to anywhere in the United States served by the United States Postal Service or Federal Express. Priority orders are expedited in its fulfillment process. The company's goal is to ship the products the same day that the order is received. For prescription medications, its goal is to ship the product immediately after the prescription has been authorized by the customer’s veterinarian.

Purchasing

The company purchase its products from a variety of sources, including certain manufacturers, domestic distributors, and wholesalers. There were four suppliers from whom the company purchased approximately 50% of all products in fiscal 2019. The company believe having strong relationships with product manufacturers and distributors will ensure the availability of an adequate volume of products ordered by its customers. Some of the major manufacturers of prescription and non-prescription medications have declined to sell these products to direct marketing companies, such as its company. (See Risk Factors.) Part of its growth strategy includes developing direct relationships with all of the leading pharmaceutical manufacturers of the more popular prescription and non-prescription medications.

Employees

The company currently have 199 full time employees, including: 107 in customer care and marketing; 29 in fulfillment and purchasing; 52 in its pharmacy; 3 in information technology; 3 in administrative positions; and 5 in management. None of its employees are represented by a labor union, or governed by any collective bargaining agreements. The company consider relations with its employees to be satisfactory.

Financial highlight

Sales were relatively flat at $59.9 million and $60.1 million for the quarters ended December 31, 2019 and 2018, respectively. For the nine months ended December 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 ended December 31, 2018. The decrease in sales for the nine months ended December 31, 2019 was primarily due to decreased new orders and reorder sales. The Company acquired approximately 76,000 new customers for the quarter ended December 31, 2019, compared to approximately 81,000 new customers for the same period the prior year. For the nine months ended December 31, 2019 the Company acquired approximately 313,000 new customers, compared to 366,000 new customers for the nine months ended December 31, 2018. The following chart illustrates sales by various sales classifications:

Gross profit decreased by approximately $1.7 million, or 8.7%, to approximately $17.7 million for the quarter ended December 31, 2019, from approximately $19.4 million for the quarter ended December 31, 2018. For the nine months ended December 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 ended December 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 ended December 31, 2019 and 2018, respectively, and for the nine months ended December 31, 2019 and 2018, gross profit was 28.4% and 34.1%, respectively. The gross profit percentage decreases for the quarter and nine months ended December 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. The company 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% in June 2019, to 28.6% in September 2019, and to 29.5% in December 2019.

Liquidity and Capital Resources

The Company’s working capital at December 31, 2019 and March 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 ended December 31, 2019 and 2018, respectively. This change can be mainly attributed to a decrease in the Company’s net income for the nine months ended December 31, 2019. Net cash used in investing activities increased to $1.8 million for the nine months ended December 31, 2019, compared to net cash used in investing activities of $507,000 for the nine months ended December 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 ended December 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 ended December 31, 2019.⁴

References

1. ^ https://en.wikipedia.org/wiki/PetMed_Express
2. ^ https://www.sec.gov/Archives/edgar/data/1040130/000143774920001273/pets20191231_10q.htm
3. ^ https://www.sec.gov/Archives/edgar/data/1040130/000143774919010894/pets20190331_10k.htm
4. ^ https://www.sec.gov/Archives/edgar/data/1040130/000143774920001273/pets20191231_10q.htm