PetMed Express, Inc.
Q1 2021 Earnings Call Transcript

Published: 26 Jul 2021

[Operator:]

Welcome to the 1-800-PetMeds Conference Call to Review the Financial Results for the First Fiscal Quarter ended on June 30, 2021. At the request of the Company, this conference call is being recorded. Founded in 1996, 1-800-PetMeds is America’s most trusted pet pharmacy, delivering prescription and non-prescription pet medications and other health products for dogs, cats and horses, direct to the consumer. 1-800-PetMeds markets its product through national advertising campaign, which direct consumers to order by phone or on the Internet, and which aim to increase the recognition of the PetMeds family of brand names. 1-800-PetMeds provides an attractive alternative of obtaining pet medications in terms of convenience, price, ease of ordering and rapid home delivery.

[Bruce Rosenbloom:]

Thank you. I would like to welcome everybody here today. I would like to remind everyone that the first portion of this conference call will be listen-only until the question-and-answer session, which will be later in the call. Also, certain information that will be included in this press conference may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 or the Securities and Exchange Commission that may involve a number of risks and uncertainties. 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 vary significantly based on a number of factors that may cause the actual results or events to be materially different from future results, performance or achievements expressed or implied by these statements. We have identified various risk factors associated with our operations in our most recent Annual Report and other filings with the Securities and Exchange Commission. For today’s conference call Gian Fulgoni, our Board Chairman is joining us. Now we will review the financial results. We will compare our first fiscal quarter ended on June 30, 2021 to last year’s quarter ended June 30, 2020 and, in some cases, referred back to pre-pandemic time periods as well. In our first quarter of fiscal 2022, we faced a unique situation. We are coming off a very strong June quarter last year that was primarily driven by increased e-commerce demand as a result of the pandemic, causing many retail stores to close and many veterinarians to be unavailable. However, during the most recent quarter, while the pandemic was abating and retail stores and veterinarians were reopening, the advertising market was rapidly recovering with surging demand, drastically driving up the cost of advertising on a per impression basis. As a result, even the overall advertising spending for the quarter increased over the prior period, we delivered fewer ad impressions than our prior years. Our total net advertising for our income statement did in fact decreased due to increased cooperative marketing rebates, which were earned in the quarter. For the first fiscal quarter ended on June 30, 2021, sales were $79.3 million compared to sales of $96.2 million for the same period the prior year, a decrease of 17.6%. The sales were relatively flat versus the quarter ended June 30, 2019 prior to the pandemic. The decreases in sales were due to decreases in both new order and re-order sales.

[Gian Fulgoni:]

Thank you, Bruce. And good morning, everyone. So, I’d like to take this opportunity to make a few comments about the future of the company, which, despite the challenges of the most recent quarter, I believe, remains exceedingly bright. So, why do I say that? Well, there are numerous reasons. First, I would point out that the pet care market is growing rapidly, and many consumers have become new pet owners during the pandemic. Second, the market is rapidly shifting to online buying with PetMeds drives. Third, many new products and services, which are often driven by technology and other innovations, are being introduced and we anticipate making some selective, strategic equity investments in these innovative enterprises by leveraging some of the capital that we have on hand. Fourth, we plan on revamping our marketing positioning and increasing our product offerings. We’ll do that along with retooling, our marketing strategies and tactics to further build our customer base and ensure that the company success will continue in tomorrow’s digital world.

[Operator:]

Our first question comes from Ben Rose with Battle Road Research. Your line is open.

[Ben Rose:]

Yes, good morning, gentlemen. A few questions. It’s been several months since you hinted at the potential to introduce new products. So I was hoping, either Bruce or Gian, if you could give us some insight into what kind of products you might be thinking of. Are these complementary to pet medications? Are they sort of adjacent segments that you might be addressing?

[Gian Fulgoni:]

Yes. I think just I’ll make a couple of comments, Bruce, and I’m sure you have some as well. I think that the market that we’re in, which is really the health and wellness market, that there are a lot of products that we could add to our product mix but still remain within that broad definition of the market. There are also, as I mentioned in my comments, innovative technology-based products that are coming along that we may be able to carry in our product mix. So I would imagine that the new CEO is going to be taking a very hard look at what can be done to expand the product line while taking care that the weight, if you will, of the products doesn’t cause us a problem with the cost of shipping. Bruce, any other comments?

[Bruce Rosenbloom:]

Yes. I mean we talked about this before, Ben. We’re always continually looking to add more product offerings to our website. Most recently, we’ve added more Rx and high-end food SKUs – premium dog food SKUs, gives us a better chance for profitability. But we’re always exploring additional ways to acquire new customers through any partnerships, fulfillment or any value-added services, other new opportunities within the pet health space, as Gian mentioned. That will be our focus this year, and we’ll give you more information in the later part of the year when we have something to report.

[Ben Rose:]

Okay. And if I may, just a couple more. One strategic question was – noted your desire to potentially make selective strategic investments. Does this mean that you’d be looking more to invest in other companies as opposed to acquiring them outright?

[Bruce Rosenbloom:]

Well, we’ve always looked aggressively at acquisition and other investment opportunities in the past. There always seemed to be a little gap between the expectation of both the buyer and the seller. But we plan to be aggressive this year, and based on our press release and the comments we made today, I would probably say yes.

[Ben Rose:]

I think…

[Gian Fulgoni:]

I’m sorry. Yes. From my perspective, I’ve spent a lot of years in the technology sectors. And it’s pretty clear that technology is rapidly accelerating in the pet care market broadly, often in times of – in examples of new services. And I think that selective investments in those types of products, coupled with then the ability to introduce them broadly to our customer base, represents a pretty attractive opportunity that I think we should be pursuing.

[Ben Rose:]

Okay. That certainly makes sense. And then if I may, finally, the AutoShip & Save. Bruce, can you start – can you comment on how long that’s been available? Did I hear you say that it’s just been available in the last week? Or has it been – if you could just let us know when that started?

[Bruce Rosenbloom:]

Correct. Yes, it was launched last week or maybe eight or nine days ago. We’re really excited. I mean we’re looking to add this for some time. Our customers have been asking for this feature, especially for the customers who order monthly medications. That’s pretty critical, I think. I think – we anticipate AutoShip will continue to drive future reorder sales, and it will also strengthen our relationship with our customer base.

[Ben Rose:]

Okay. Thank you very much.

[Bruce Rosenbloom:]

You’re welcome.

[Operator:]

Erin Wright with Credit Suisse. Your line is open.

[Erin Wright:]

I have a quick follow-up on that last question on AutoShip. What percent of customers do you anticipate will use the offering? Or what’s the goal there just based on the mix of business that’s considered more chronic therapy or preventative? Would it be purely focused on some of that monthly flea and tick medication or other categories? Or what percentage of your customers do you anticipate that targeting?

[Bruce Rosenbloom:]

Yes. I don’t think we’re going to give any specific targets or internal targets at this time. But as you know, Erin, the overwhelming majority of what we sell, especially in the prescription medications, are those monthly, every three months, every six months. So that would qualify for a large portion of our business. So we’ll give more updates as we go along, but we’re very excited about the launch.

[Erin Wright:]

Okay, great. And then how would you characterize the flea and tick season this year? I guess what are you seeing across that category of products this quarter? And how would you characterize the shift that you’re seeing between the prescription-only product and the over-the-counter flea and tick products and how that’s impacting your business financially?

[Bruce Rosenbloom:]

Right. We really have seen – it’s been a tale of two different years. I mean last year we saw a greater amount of over-the-counter products. And that’s because many of the pet stores and, obviously, veterinarians, pet stores and other brick-and-mortar stores were closed. So typically, we saw an unusual lift in over-the-counter products last year. This year was back to more normalized levels between – the breakdown between Rx and OTC.

[Erin Wright:]

Okay. Thanks. And then given some of the ad spend dynamics you were referring to, how should we be thinking about the quarterly progression of advertising spend for the balance of the year? And separately, for the balance of the year as well, should we anticipate further additional costs associated with the brand and marketing consulting fees similar to what was incurred in the first quarter?

[Bruce Rosenbloom:]

Right. That’s a good question. When we look at overall ad spend for the quarter, it was, in fact, slightly up versus a year ago. However, when we looked at the net number, of course, with the manufacturer rebates that we received, looking at the income statement, you will see a decline in ad spend. We were aggressive with advertising, but the environment was a very difficult environment. On a per-impression basis, costs increased significantly as a result of the crowded advertising landscape, which, of course, delivered fewer overall ad impressions. Going forward, we will continue to be aggressive with our ad spending. Our budget is flexible. So depending on ROI, we may adjust it from time to time. Rapid changes in that advertising landscape requires some real-time adjustments. I think overall, like I said, ad spending was up for the quarter, and we’ll continue to be aggressive going forward. And I think as we move into the second half of the year, traditionally as we get out of season, we have some better opportunities on the ad front historically.

[Gian Fulgoni:]

Bruce, just to add a couple of comments. One of the things that is increasingly possible especially with digital media is to examine the degree to which there’s an overlap across the different channels. Because if one doesn’t do that, one risks delivering just increasing number of impressions with the same number of people. And I think there’s a significant opportunity for us to review that in greater detail and make more informed decisions about where to put our ad dollars. So I’m not sure at this point how that would shake out, but I do – in terms of the total dollars spent, but I think there are some pretty compelling opportunities to increase the efficiency and effectiveness of our media spend.

[Erin Wright:]

And the consulting fees, will those continue?

[Bruce Rosenbloom:]

That’s something that we’ll be considering as the year progresses. I mean a lot will depend on when we bring new leadership in and what his preference will be. And if there is, we’ll let you know if it’s a material amount.

[Erin Wright:]

Okay. Thank you.

[Operator:]

Anthony Lebiedzinski with Sidoti & Company. Your line is open.

[Anthony Lebiedzinski:]

Thank you and good morning, and thanks for taking the question. So my first question is for you, Gian, and thank you for joining the call here. Nice to get a perspective from the Board of Directors. So as you look to hire a new CEO, what are the top qualities that you’re looking for, for your new leader? Just wanted to get your perspective.

[Gian Fulgoni:]

Yes, that’s a good question. Thank you. So I think that there’s definitely certain experiences that we would look at as being important. E-commerce – senior executive leadership of an e-commerce business is important. If we can add to that experience in the pet care markets, I’d say that’s also important. But I would rank the e-commerce experience as being the most important there, somebody who has a desire and some experience in transformation of companies. And what’s interesting at this point in time is that it used to be that digital transformations would be applied to companies that weren’t yet digital. I think that increasingly today we’re seeing, given the rate of change of digital technology, we’re seeing some significant opportunities to revamp the operations of companies that are already digital. And so somebody who’s been through transformations and has that kind of experience, that would also be pretty important to us. So I think that – I think those I would say are the most important categories that we’re looking for.

[Anthony Lebiedzinski:]

Got it. Okay. Yes, so that’s very helpful. And I guess what we’ll stay tuned for the announcement in regards to that. So PetMed traditionally has had a very strong cash-rich, debt-free balance sheet. Just wondering from the board’s perspective, are you looking to maintain that same type of capital allocation or would you be willing to do anything differently with new leadership?

[Gian Fulgoni:]

Yes, that’s another good question. Yes, certainly if you look at the PetMed as an internet-based company, its profitability has been surprisingly strong, right, given the number of companies that in the tech space, certainly that are out there growing rapidly, but not yet making a profit. So I personally think that continuing to be nicely profitable is important, but I think that can be achieved. And I think we’ve – we kind of established a roadmap for how to achieve that. In any situation, in my experience where you have a change at the CEO level, it’s very possible that there might be some investments required in the short-term to establish the new strategic plan and the new path forward. But I would hope that, that would be done as I say in a short-term temporary basis that then leads to an acceleration in both top line and bottom-line growth. Hope that helps.

[Anthony Lebiedzinski:]

Got it. Yes. Okay. Yes, for sure. And then in terms of the ad spending, would you say – are you still going to be mostly digital you think, or will you do more TV? Kind of just broadly thinking about the different media channels as far as advertising is concerned. What are your thoughts there?

[Gian Fulgoni:]

Yes, so obviously one of the trends that’s just accelerated dramatically in large part because of the pandemic is connected TV, right, over-the-top distribution of content, a lot of it which is content that was being distributed on legacy TV and continues to be, but now it’s increasingly being delivered over-the-top. It’s getting a significant audience, and so I don’t think we can ignore it. I think it’s important to look at the – as always, to look at the demographics of the users of these different video channels. That said, I can certainly refer back to work we did at Comscore, extensive work looking at the effectiveness of static display ads versus video, and it was pretty clear that video was significantly more effective. So I would imagine that there are some really attractive opportunities for us to put some money against connected TV and over-the-top, and maybe to broaden our investments in video. And I’d certainly encourage the new CEO to look at those kinds of opportunities. But digital, I mean, over-the-top TV is digital, right, when all is said and done. And so this kind of this transition from what was TV content distributed over the air or via cable and that was being distributed digitally. So the term digital becomes broader in today’s world, but I think that there, again, there are significant opportunities that we should be pursuing here.

[Anthony Lebiedzinski:]

Got it. Okay. And lastly for me as far as the loyalty program have you – can you give us an update what you’ve seen there, whether you expect to make any changes to that going forward?

[Bruce Rosenbloom:]

With the loyalty plan, listen, we’re always looking to improve on any of our – anything that we have, especially when it concerns to the website. We’re very happy with the performance of the plan. To date, it has helped reorder sales from our initial launch. But I think with adding AutoShip & Save in conjunction with our loyalty plan – and the loyalty plan may change too, it’s not necessary the way we additionally launched, it may not be the way that plan will be working in the future. So I think as we move forward, we’ll see some changes and when we make those changes, we’ll let you know.

[Anthony Lebiedzinski:]

Got it. All right. Well, thank you and best of luck.

[Bruce Rosenbloom:]

Thank you.

[Operator:]

I’m showing no further questions, Mr. Rosenbloom. Mr. Fulgoni, I’ll turn the call back over to you.

[Gian Fulgoni:]

Okay, thank you. This wraps up today’s call. I really appreciate your time. Thank you for joining us. Operator, this ends the conference call.

[Operator:]

Thank you for participating. You may now disconnect.