Introduction
PetsMed Express, Inc. is one of the fastest-growing companies of the last decade in the United States. Even in these hard times of crisis and downturn economy, PetsMed continues to report stable growth and revenues. It has become one of the most recognized brands in the States regarding pet control and medications, be those prescribed or non-prescribed.
Products and brands of this company include “flea and tick control products, bone and joint care products, vitamins, hygiene products, heartworm preventatives, thyroid and arthritis medications, antibiotics, and other specialty medications for cats, dogs, and horses. PetsMed primarily sells its products to retail customers, pet stores, and groomers. The company was founded in 1996 and is headquartered in Pompano Beach, Florida” (Luther, 2010, pg. 1).
Nevertheless, many investment analysts and many other business people are not quite an enthusiast about this company. Most of them do not see it as a “great company at a good price value play that Warren Buffett speaks of, but it is approaching the “good company at a great price” that Benjamin Graham, and later Walter Schloss, was, and is, in search of” (Luther, 2010, pg. 1).
This short assignment points at some aspects of why this company is not as solid or great as it seems. By critically evaluating certain aspects of their yearly and quarterly report, we will try to show the hidden aspects of this business firm. Is it a good investment opportunity or is it a company upon which the numbers do not tell you all the sides of the story?
Many authors and investment analysts believe that the reliability and the strengths of a company do not lie only in cash figures reported. Sales increase, revenue growth, income generation, etc. are indeed quite important figures for a business. Nevertheless, some other factors need to be considered before evaluating if a business is going to be successful on a long-term basis or not. These include their debt to income ratio, bad debt, employer satisfaction, customer satisfaction, business strategy, taxes, accounting standards of reporting, etc.
More specifically we will focus on how the company reports and footnotes deferred taxes, leases, pensions, dilutive securities, earnings per share, stock options, and accounting changes. In addition, we will try to point out and discuss how these topics affect the cash flow statement.
We will focus on form 10-K which is the requirement that all publicly traded companies have to fill and deliver to the Securities and Exchange Commission of the United States.
Body
Before starting the analysis of the present form 10-K, that of the last fiscal year, let’s take a look at the recent history of the company. Its numbers are quite stunning and impressive. For example, for the past seven to eight years, the company jumped from US$10 million in annual revenues to approximately US$238 million. Divide per year, which corresponds to a growth rate of approximately 39% in revenues per annum. That is impressive by any standard. The closest competitor in the area, PetSmart, Inc. had an average annual growth rate of 9% of its revenues.
It is in the last two years, 2009 and 2010 that PetMed has begun to report a much smaller growth percentage of 8.61%. Yet, it was bigger than the sale revenues growth reported by its closest rival, PetSmart, which had a rate of approximately 6%. Overall, PetMeds claims to have achieved a market share of 5%, when all other retailers combined account for the same market share in the industry (Lade, 2011).
The 2010 Annual Report of the company does show all of these achievements.
It is interesting to note that before beginning with the financial data, the annual reports present two tables and one graph which attract the attention of the reader.
The two tables relate to the common stock share value of the company and the dividends that stockholders got. These tables show the increase in stock value for the company and the increase in dividends for the shareholders. They are accompanied by a graphical representation of the performance of the company for the past year.
This performance is very attractive for a reader because the graph compares PetMed’s performance with that of major indexes like S & P 500 and Russell 2000. It is interesting to note that there is no comparison in performance related to a direct competitor. One must note that comparing a company to major indexes does not show the strength of that company.
The next report is the presentation of selected financial data. In this table, we find the cost of sales, sales volume, operating expenses, net income for the company, net income for shareholders, cash dividends for shareholders, total assets, total liabilities (at the end of the table and page), and shareholders’ equity.
All this information is a comparison of the last five years, from the fiscal year 2006 until the fiscal year 2010. It is quite strange that outstanding debt along with short-term or long-term debt, or even bad debt, are not shown in this selection of financial data. The company does show its total liabilities but one has to guess its composition.
The next section of the annual report is an explanation of management’s decisions and actions and the analysis of the financial conditions of the company. After the executive summary, there is only one short paragraph that relates to accounting standards and their change. In it, the company declares that it prepares its financial statements by the general accounting standards accepted in the country. Officially the company declares that it will:
“…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.” (PetMed, 2011)
Yet, it is not clear by the annual report filed what are these critical accounting policies that the company follows and there is no example demonstrating any case they have re-evaluated their judgments or estimates during the past decade. One of the reasons why companies tend not to show their accounting policies may be the fact that they can change the form of estimation and declaration so that they can benefit.
Another important issue to be noted is the way PetMed generates income. According to its statement, the company has a policy “to recognize revenue from product sales upon shipment, when the rights of ownership and risk of loss have passed to the customer” (PetMed, 2011). And that has been one of the rising problems during the past two years for the company.
Customer complaints have been rising during the last two years. In fact, during this period the company has had to close 32 complaints through its rating agency, BBB Accreditation, Inc. (BBB Accreditation, 2011). Even though the rating agency rates PetMed with an A+, still the increase in customer complaints during the past three years is something that should be considered carefully. Unfortunately, that is something that is not presented in this annual statement.
The annual statement continues with the presentation of sales and income generation. It also has a section dedicated to the provision for income taxes. It seems like the company is keen to show the increase in provision for income taxes it has transferred to the government. Yet, one should note that the increase in sales and revenues and the increase in operating and net profit are quite higher than the increase in income taxes.
There is also a small table showing the contractual obligations and commitments that the company has. It is curious to note that in total the company has more than US$5.5 million in obligations ranging from one to five years. At the end of this page, there is also another small section dedicated to accounting standards and the commitment to conform to the Accounting Standard Codification and that it has begun its transition from the previous standards to the new Codification standard since the second quarter of 2009. The company commits to making this transition smoother, even though it is a major change.
It is interesting to note that the company states that it 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” (PetMEd, 2011). That is strange since only a couple of paragraphs above one can find that this is a major change in reporting standards for the firm.
Conclusions
Lastly, before the external auditor report attached to this annual statement, there is a part dedicated to market risk. The most interesting part of it is that PetMEd admits that a “significant change in interest rates would impact the amount of interest income generated from our excess cash and investments.
It would also impact the market value of our investments” (PetMed, 2011). That is also something not presented as a liability in their consolidated financial statement. This is strange since the changing of interest rates in the United States has become something “normal” in the past decade. They have even changed in considerable ranges.
It is quite abnormal that the company has not included this as a liability, yet admits it as a potential risk. And finally, it is interesting to note that there is no reference to any sort of IRA or 401(k) plan for employees. The only part when employees are mentioned is at the introduction of the annual report where the company proudly states that its employees are not part of any collective organization or union.
References
BBB Accreditation, Inc. (2011) “PetMEd Express, Inc. Rating”, BBB Accreditation List. Web.
Lade, D. (2011) “PetMeds doggedly takes on tough economy and competitors”. SunSentinet Online. Web.
Luther, R. (2010) “PetMed Express: Good company at a great price”. Seeking Alpha. Web.
PetMed Express, Inc. (2011) “Form 10-K: Annual report pursuant to section 10 of the Securities and Exchange Act of 1934”. The United States Securities and Exchange Commission. Web.