PetMed Express, Inc.
Q4 2023 Earnings Call Transcript

Published: 22 May 2023

[Operator:]

Good afternoon, everyone, and thank you for joining the PetMed Express Third Quarter (sic) [Fourth Quarter] Earnings Conference Call. My name is Doug, the operator for today's call. I would now like to pass the conference over to our host, Mr. Brian Prenoveau, Investor Relations. Sir, the floor is now yours.

[Brian Prenoveau:]

Thank you, operator, and I'd like to welcome everybody to the PetMed Express fiscal fourth quarter earnings call. I would also 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 during this call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934 as amended 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 results could differ materially from those projected. There can be no assurance that any forward-looking results will occur or be realized. And nothing contained in this presentation is or should be relied upon as a representation or warranty as to any future matter, including any matter in respect to the operations or business or financial condition of PetMeds. PetMeds undertakes no obligation to update publicly these forward-looking statements based on subsequent events, except as may be required by applicable law, regulation or other competent legal authority. 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. Also, during the course of today's call, the company will be discussing one or more non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release we issued this afternoon. Now let me introduce our CEO and President, Matt Hulett. Matt?

[Matthew Hulett:]

Thank you, Brian. Thank you for making the time today to participate in our earnings call. We will be walking you through the following components in today's earnings call

[Christine Chambers:]

Thanks, Matt. I'm going to discuss this most recent quarter and provide an update on the tax liability we mentioned last quarter. First, let me turn to our financial results for the quarter ending March 31, 2023, our fourth fiscal quarter. My remarks will compare this year's quarterly results to the same quarter last year. Fourth quarter sales were $62.4 million compared to the sales of $66 million in the same period last year, a decrease of 5%. As Matt mentioned, we continued our trend related to net new customer growth year-over-year. We welcomed approximately 72,000 new pet parents this quarter compared to 65,000 in the prior year, representing growth in excess of 12% year-over-year. However, repeat sales of $56 million for the quarter decreased 6% compared to the same period last year. We continue to see contraction in the over-the-counter medication market, in line with the macro trends being across the industry that Matt discussed earlier. To put a finer point on this, our largest percentage decrease was from the flea and tick over-the-counter medication category. This last quarter experienced a large amount of price discounting in online and offline retailers. OTC medication has become an increasingly smaller percentage of PetMed's overall sales. We've seen continued growth of our AutoShip & Save sales as a percentage of total sales, driving greater engagement and recurring revenue. This will help strengthen our repeat sales base. As Matt mentioned, AutoShip & Save sales as a percentage of total sales was 44% in the quarter, up from 42% last quarter and from 31% in the same period last year. Gross profit for the quarter as a percentage of sales was 27.9% as compared to 29.4% for the same quarter last year and 25.9% for the prior quarter. Last quarter, we leaned into deeper seasonal promotions that were focused on lapsed customers. Compared to last year, we also saw an increase in per order freight expenses. G&A increased $10.7 million year-over-year. This included a onetime tax accrual for $6.9 million in the quarter. When normalized for the tax liability and non-operating costs related to the PetCareRx acquisition advisory fees, G&A increased $2.7 million year-over-year. This is due to an increase of $1.3 million related to payroll expenses, $600,000 related to third-party resources and some increases in software expenses related to ongoing improvement in our operating tools and processes. That said, as we look forward, we do not expect G&A, excluding non-operating items to continue to increase at the same rate. We believe the team is largely being put in place and the G&A will be fairly flat on a go-forward basis. As we integrate and layer on the PetCareRx teams, we expect to drive cost synergies through PetCareRx that will get the standalone business accretive by the end of the year. We take our responsibilities to our shareholders seriously, and we are committed to operating with the highest standards of transparency and integrity. As I mentioned last quarter, we received and accrued for a sales tax assessment in the second quarter of fiscal year 2023. Based on the assessment received, the company initiated a process to evaluate the potential for further sales tax contingencies. We have conducted a thorough analysis with tax expert. And based on this analysis, we have accrued an additional $6.9 million this quarter related to prior year sales tax liabilities. Net loss for the fourth quarter was $5.1 million or $0.25 per diluted share compared to net income of $6.1 million or $0.30 per diluted share for the same quarter last year. This quarter includes the $6.9 million tax accrual I mentioned earlier, equal to approximately $0.25 per diluted share. Adjusted EBITDA for the quarter was $3.6 million compared to $9.5 million for the same quarter last year. The decrease in adjusted EBITDA reflects lower gross margin of $2 million, higher G&A spend of $2.7 million and lower marketing co-op dollars. Turning to Slide 11. We continue to maintain a strong balance sheet and cash position. We ended the fiscal year with $104 million of cash on the balance sheet and no debt. Subsequent to quarter end, we paid $36 million cash for the acquisition of PetCareRx. As always, management remains committed to increasing total shareholder returns. In support of that commitment, we are declaring a $0.30 cash dividend payable in June this year. We continue to evaluate our dividend policy as we assess the growth opportunities in front of us. We expect to be able to build recurring revenue while also growing our new customer base in our core business. This year, we will be focusing effort to set up the expanded product catalog to drive organic growth and to generate organic synergies that will meet PetCareRx accretive before the end of the year. In the longer term, we will generate further value creation from adding differentiated services, such as with our Vetster and Pumpkin partnership, with a more immediate upside to our PetMeds business, through expanding our wallet share by selling food and a broader assortment of consumables. In the immediate term, our mantra is to digest and execute. Our management team has made a lot of investments in and foundational changes to the business. As a result of these investments, the company today has a much stronger foundation for future success. After having now completed the PetCareRx acquisition and the investments in Vetster and Pumpkin, we want to make sure that those businesses are well integrated, nurtured and driving meaningful improvements in financial results for the company. I will now turn the call back over to Matt for some concluding remarks prior to Q&A.

[Matthew Hulett:]

Thanks, Christine. This next fiscal year for pet meds will be important for the company. We expect to show growth in new customers as well as a stabilized recurring sales base, but most importantly, healthy top line revenue growth while keeping our fixed costs stable. We expect to get leverage in our P&L as we add revenue scale. Investors shouldn't expect to hear a lot about new inorganic activity because the company has been so active of late. Management will be focused on operational execution that includes integrating our recent partnerships and investments. We believe that we have assembled the components to deliver long-term growth and profitability. For this upcoming quarter, PetMeds is feeling more comfortable around our growth strategy and visibility into our future performance. We like the strategy that we are pursuing as a premium specialty retailer brand. We strongly believe that there is room to navigate and thrive in a large addressable tech market with a set of strong differentiated solutions for pet parents. As we have said in previous calls, we aim to be pet parents' trusted pet health expert. We've been sharing our growth strategy with you for a little over a year, and we have substantially filled in the pieces to build an enduring, profitable and growing pet health company. To be crystal clear on those measures, year-over-year customer growth, continued recurring revenue, expect to see continued progress on our AutoShip & Save program. In addition, we are excited about our new wholesale membership product called PetPlus, which we now operate as part of the PetCareRx acquisition. More diversification beyond medication. PetMeds now has a more diversified catalog of premium food debt services and insurance. We believe there are great opportunities to expand wallet share, LTV and overall customer engagement and satisfaction. We have checked those boxes, and now we're adding a new one. That being meeting and exceeding market growth rates for the entire PetMeds business. Management is feeling good about our momentum going into this current quarter and beyond. We are making great progress integrating our new team at PetCareRx as well as the other investments that we have made over the last several quarters. We are confident that investors will see improved revenues with recovering leverage in the income statement in the coming quarters. Lastly, we have a strong balance sheet that provides us with the financial flexibility to take advantage of a large and growing market. This ends our prepared remarks. Operator, we are now ready to take questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Corey Grady with Jefferies.

[Corey Grady:]

I wanted to follow up on your comments about flea and tick season. So you reported Q4, up 6% sequentially on an easier comp off last year and it's -- that's quite a bit below your typical seasonality. So maybe you can add more color on what impacted the quarter. I mean how much of that was due to the OTC contraction? And were there any other factors that contributed to the softness?

[Matthew Hulett:]

Corey, yes, as I indicated on the call, majority of that decline was the over-the-counter flea and tick medication as a percentage of the decline. And as we noted, that was largely due to offline and online price discounting that was quite excessive this season. Conversely, the Rx side of the business, which continues to be the highest concentration of where we focused sees less discounting and less price pressure, and that obviously has higher gross margins. So for us, we decided not to contribute and really compete in lower price discounting in OTC flea and tick. So that kind of explains some of that decline year-over-year, Corey?

[Corey Grady:]

All right. That's helpful. And then I wanted to just ask about the dividend. So with earnings this quarter and closing PetCareRx, can you talk about your priorities for cash and how you're thinking about your capital return strategy here?

[Christine Chambers:]

Cory, it's Christine. And thanks for the question. As we always review the dividend on a quarterly basis, and we're really feeling strongly about our ability to grow the business from some of the declines that we've seen. And I think over the long term, management wants to show those signs of the repeated -- the repeatable growth. And over time, we feel stock appreciation, the growing company will generate free cash flow that will deliver higher returns to investors. So I think we'll continue to evaluate it, but we definitely take a broader approach to it.

[Operator:]

[Operator Instructions] Our next question comes from the line of Anthony Lebiedzinski with Sidoti & Company.

[Anthony Lebiedzinski:]

So just a follow-up on Q4 sales. Was there any noticeable impact do you think from the weather? Obviously, that does influence the timing of when people purchase flea and tick medication. So just want to get your thoughts on that.

[Matthew Hulett:]

Anthony, this is Matt, obviously. No less so on weather and more so on the over-the-counter flea and tick medication trends in terms of price discounting had a more pronounced impact to the sales side of the business. However, we are feeling better, management feels a lot better around the stabilization of PetMeds in this quarter and as well as PetCareRx integration. So we're feeling good about the stabilization of PetMeds. And like I said, more and more of the business has been more Rx focused. So we haven't seen those trends per se reflected in the core prescription refill Rx business for PetMeds.

[Anthony Lebiedzinski:]

Got you. Okay. And then going back to the third quarter, your gross margin was hit somewhat because you reactivated some dormant customers with some promotions. So as that happened -- so now that we're ready actually now more than halfway done with the first quarter here? So in terms of those reactivated customers, have you seen anything as far as those customers going back and purchasing products from PetMeds?

[Matthew Hulett:]

Great question. First off, it was great to see that trend continue. We had two quarters of sequential net new customer growth, which is a trend we broke that hadn't been really a trend that we've seen for a couple of years in terms of net new customer growth year-over-year. Secondarily, as you know, PetMeds traditionally has been a low engagement platform, primarily focused on Rx prescription refill. And so it's going to be a little bit of time until we get other more highly consumable products like food, prescription food, premium food onboard to see those trends, but early indicators are that the customers that we reactivated was a good strategy. And lastly, I'd say the ability for us to be marketing efficient has made us a little bit more confident that we don't have to discount as aggressively to get these customers back onto the platform. So those three things combined make us feel pretty good about where we're spending our media dollars and how we're effectively bringing back lapsed customers.

[Anthony Lebiedzinski:]

Got you. Okay. And then of course PetCareRx talked about operational synergies. So now that you've already acquired the company for a few weeks since the beginning of April, in terms of those operational synergies, can you expand on that? And then compared to your original announcement from back in January, are you seeing an opportunity for greater operational synergies that you would have expected at first? Or how should we think about that?

[Matthew Hulett:]

That's a great question. So it's like three things in there that I'd like to say. One is the team at PetCareRx is phenomenal. We've had a really great time and an easier time integrating that team and getting them all kind of coordinated across the board. So in terms of activating a team, which I would call the most important aspect to an acquisition, it exceeded our expectations. In terms of revenue and cost integration, I'd say on the revenue side in terms of getting more size and scale benefits for things like cooperative advertising and things like that related to our overall increase in scale due to PetMeds plus PetCareRx, I think we're doing a really good job there. That was maybe happening a little bit more quickly than we anticipated. And on the cost side, we're doing a really good job of looking at ways in which we can streamline operations. So overall, I think we're really pleased with how it's going thus far and that we have managed two teams with two different brands, maybe a little bit better than expectations in terms of integration. So it's really great to see that team in New York really, really embrace the PetMed culture. And we, in turn, at PetMeds have really embraced PetCareRx. So we're really, really optimistic about this.

[Operator:]

There are no further questions in the queue. I'd like to hand the call back to Mr. Hulett for closing remarks.

[Matthew Hulett:]

Thanks, operator. Thank you for joining our call today. I'm confident that the future we envision for PetMed along with the foundation that we've been laying will meet the market opportunity in unique and innovative ways. And will lead to increased operating results and shareholder value. PetMed's brand, expertise and reputation are unparalleled. We have greatly accelerated our operating roadmap, and we look forward to sharing our progress as we go to market with products and services that positively change the lives of our pet parents and pets. Thank you for your continued support.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.