Shares of PetMed Express (PETS), Inc., an online pharmacy for pets, are up more than 20.8% over the past year, in part, because of what Wall Street believes to be strong earnings trends. However, the company’s latest 10-Q raises questions about the quality of PetMed’s earnings.

The company earned $7.6 million in the fourth quarter of 2020. Net income in the quarter is being inflated by a one-time state income tax refund of $285,000 The refund accounts for 3.7% of PetMed’s Q4 net income.

The inflated quarterly earnings prompted us to take a closer look at PETS’ financial statements from prior years. Sales in the fiscal year ending 3/31/2020 grew 0.2% yet accounts receivable grew 51.1% yoy. This is a significant increase to the prior fiscal year, when sales grew 3.5% and receivables increased 10.9% yoy.

Customer Health Concerns
When receivables significantly outpace sales growth it can indicate customer health is declining; customers may be unable or taking longer to pay. This appears to be part of the problem as the allowance for doubtful accounts increased to $59 million in FY20, up from $39 million and $35 million in 2019 and 2018.

Though receivables have spiked, PETS’ receivables turnover ratio— which measures how efficiently it collects its receivables— declined to 89x in FY20, down from 117x and 139x in 2019 and 2018.

Inventory Obsolescence Concerns
When inventory growth significantly outpaces cost of goods sold it can indicate inventory may be obsolete. Following a fiscal YoY decline, the latest 10-Q shows a 51% increase in inventory compared to nine months earlier (3/21/2019). Yet during the same nine month period, PETS’ cost of sales increased just 11.9%.

The company acknowledged inventory obsolescence in the latest 10-Q. PETS created an inventory reserve of $71,000 at December 31, 2020 compared to $45,000 just nine months earlier.