PetMed Express, Inc.
Q2 2015 Earnings Call Transcript

Published: 19 Oct 2015

[Operator:]

Welcome to the PetMed Express Incorporated doing business as 1-800-PetMeds, Conference Call to review the Financial Results for the Second Fiscal Quarter ended on September 30, 2015. At the request of the company, this conference call is being recorded. Founded in 1996, 1-800-PetMeds is America’s largest pet pharmacy delivering prescription and non-prescription pet medications and other health products for dogs and cats direct to the consumer. 1-800-PetMeds markets its products through national television, online, direct mail, and print advertising campaigns, which directs consumers to order by phone or on the Internet and aim to increase the recognition of the PetMed’s family of brand names. 1-800-PetMeds provides an attractive alternative for obtaining pet medications in terms of convenience, price, ease of ordering, and rapid home delivery. At this time, I would like to turn the call over to the company’s Chief Financial Officer, Mr. Bruce Rosenbloom. Sir, you may begin.

[Bruce Rosenbloom:]

Thank you. I would like to welcome everybody here today. Before I turn the call over to Menderes Akdag, our President and Chief Executive Officer, 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. Now let me introduce today’s speaker, Menderes Akdag, the President and Chief Executive Officer of 1-800-PetMeds. Menderes?

[Menderes Akdag:]

Thank you Bruce. Welcome and thank you for joining us. Today we will review the highlights of our financial results. We will compare our second fiscal quarter and six months ended don September 30, 2015 to last years’ quarter and six months ended on September 30, 2014. For the second fiscal quarter ended on September 30, 2015 sales grew $56.7 million compared to $57.6 million for the same period the prior year, a decrease of 145%. For the six months ended on September 30, 2015 sales were $128.4 million compared to $130.1 million for the six months the prior year, a decrease of 1.4%. The decreases in sales were due decreases in new order sales. The average order value was approximately $80 for the quarter compared to $75 for the same quarter the prior year. For the second fiscal quarter, net income was $4.5 million or $0.22 diluted per share compared to excluding a one-time charge for a discontinued project $3.8 million or $0.19 diluted per share for the same quarter the prior year, an increase to net income of 18%. And for the six months, net income was $10.3 million or $0.51 diluted per share compared to again scoring a one-time charge for a discontinued project $8.8 million or $0.44 dilute per share a year ago, an increase to net income of 17%. Reorder sales were relatively flat at $46.7 million for the quarter, compared to reorder sales of $46.6 million for the same quarter the prior year. For the six months, the reorder sales increased by 1% to $106.2 million compared to $105.1 million for the same period last year. New order sales decreased by 8% to $10.1 million for the quarter compared to $11 million for the same period the prior year. For the six months, the new order sales decreased by 11.4% to 22.1 million compared to $25 million for the same period last year. We acquired approximately 127,000 new customers in our second fiscal quarter, compared to 152,000 for the same period the prior year. And we acquired approximately 275,000 new customers in the six months, compared to 336,000 for the same period a year ago. Approximately 81% of our sales were generated on our website for the quarter, compared to 80% for the same period the prior year. The seasonality in our business is due to the proportion of flea, tick and heartworm medications in our product mix. Spring and summer and considered peak seasons with fall and winter being the off season. For the second fiscal quarter, our gross profit as a percent of sales was 33.3% compared to 32.1% for the same period the prior year. And the for the six months, our gross profit as a percent of sales was 32.6% compared to 32.5% for the same period a year ago. The percentage increase for the quarter can be attributed to a shift in sales for higher margin items. Our general and administrative expansions were relatively flat for the quarter and the six months. For the quarter we spent $6.2 million in advertising compared to $6.9 million for the same quarter the prior year. For the six months, we spent $14.1 million in advertising compared to $16.8 million during the same period a year ago. The decreases in advertising were due to diminishing returns. The advertising cost to acquiring a customer was approximately $49 for the quarter compared to $45 for the same quarter the prior year. For the six months it was $51 compared to $50 for the six months the prior year. We had $57.8 million in cash and short term investments and $24.4 million in inventory with no debt as of September 30, 2015. Net cash from operations for the six months was $40 million. This ends the financial review. Operator we are ready to take questions.

[Operator:]

[Operator Instructions] Our first question is from Kevin Ellich with Piper Jaffray.

[Kevin Ellich:]

Menderes, a few things I guess. First off, could you talk about what was driving the higher margins, what type of products are we seeing and in what categories, and can you give us the split between generic versus branded products, and then I’ve got another question on the average order size.

[Menderes Akdag:]

Due to competitive reasons we are not going to comment on it. There was some increase in private label, I can value that.

[Kevin Ellich:]

And then on the average order size increase, was there a price increase, did you guys push through any rate increases or was this all just mix shift to just higher, you know people spending more money on various products.

[Menderes Akdag:]

We slightly increased our prices on short term brands during the quarter to pass some of the cost increases to the consumer, but also still shifted to a higher price items and we also sold higher doses.

[Kevin Ellich:]

Can you talk at all about what brands or what type of - have you used parasiticides or some of the new products that have come to market in the oral flea and tick category?

[Menderes Akdag:]

We really don’t want to comment on it due to competitive reasons.

[Kevin Ellich:]

Okay, that’s fine. And then on the increase in customer acquisition cost and advertising cost was right in line with our expectation. What are you seeing in the remnant space, are you shifting more towards online advertising or are you finding the TV rates still pretty favorable at this point.

[Menderes Akdag:]

Typically, the TV cost has been increasing about mid-single digits every year, and this year that was the case also. But we decreased TV advertising for the quarter due to diminishing returns.

[Kevin Ellich:]

And then the comment about focusing on improving marketing efforts to drive sales and profitability, could you give us a little bit more color as to what that’s going to entail, and then also your thoughts on the advertising costs heading in to the election year. Thanks.

[Menderes Akdag:]

We are running a new campaign which we started this month and we are putting more emphasis on the database marketing, we’ll see what happens. As far as election year is concerned, we anticipate that the cost will go up especially few months prior to the election.

[Operator:]

Our next question is Ms. Erin Wilson with Bank of America/Merrill Lynch.

[Erin Wilson:]

Can you give us an update on the supplies and accessories business and how that’s progressing?

[Menderes Akdag:]

It really has been actually going down, so we have not focused on it up till now, but we are planning on revitalizing it going forward.

[Erin Wilson:]

Do you anticipate that being the key strategy to sort of jump start growth in new orders or what’s your general strategy there on any sort of new initiative?

[Menderes Akdag:]

It’s really a margin issue, we like high price, high margin, light weight products which supplies obviously does not fit in to them.

[Erin Wilson:]

And then how would you characterize the flea and tick season over this past year? Did it last later than expected, were there any sort of abnormal seasonal factors?

[Menderes Akdag:]

Probably similar to last year, that will be my guess at this time.

[Operator:]

Your next is from Mr. Anthony Lebiedzinski with Sidoti & Company.

[Anthony Lebiedzinski:]

Just wanted to get your view as to the sustainability of the shift to higher margin items, is this something that you think can continue or is this more or less - were there any special factors that perhaps drove the pickup in this quarter here?

[Menderes Akdag:]

We won’t tell, so in our advertising we are exposing them all. So we’ll see what happens.

[Anthony Lebiedzinski:]

Got it. And could you perhaps quantify the overall impact of the price increase that you guys took in some of your items?

[Menderes Akdag:]

I would say may be about, I’ll give you a rough idea, I don’t have the exact math in front of me, but probably about 20 basis points or the increases due to that.

[Anthony Lebiedzinski:]

When you mentioned that in the advertising space you’re seeing diminishing returns, is this across the board that you’re seeing that or is it more TV or is it more online. Can you just give us some color in regards to that please?

[Menderes Akdag:]

More television.

[Operator:]

Your next question is from Mr. Mitch Bartlett with Craig-Hallum.

[Mitch Bartlett:]

Menderes may be you could spill out the areas of strength and areas of weakness. If I were to say that the OTC business, the flea and tick business has been under pressure for years and may be that you have withdrawn a lot of advertising initiative there, and replaced it with more concentrated focus on getting prescription customers, and that is what’s driving gross margins, that’s what’s driving AOV, is that a fair characterization and how big --.

[Menderes Akdag:]

The (inaudible) we have not given up on the flea and tick topical, but it’s somewhat fair characterization.

[Mitch Bartlett:]

What happened to the gross margins on both sides of those equations? What’s going on underneath the overall gross margin as it pertains prescription versus OTC?

[Menderes Akdag:]

Well sales shifted to a higher margin items including private label.

[Mitch Bartlett:]

But the shift also was benefitted by the gross margins in prescription perhaps.

[Menderes Akdag:]

May be.

[Mitch Bartlett:]

Okay. Alright, inventories it seems like your inventories are up year-over-year, but they have been kind of trending a little bit down. Is that a situation because of opportunity buys are less prevalent or its [stuck] to the ability to acquire favorable inventory buys.

[Menderes Akdag:]

Our inventory will fluctuate based on promotional buying opportunities. When there is a cost advantage, we’ll carry higher inventory, but don’t forget we are going in to our off-peak season.

[Mitch Bartlett:]

Right, so no need to load up on inventories.

[Menderes Akdag:]

That is correct.

[Mitch Bartlett:]

And competition on the prescription side of the business, any changes or any big movements, could you discuss that?

[Menderes Akdag:]

I would say there is no big movement, there is a little bit more competition. But we have not seen any big movement.

[Operator:]

Our next question is from Mr. Juan Bejarano with Noble Financial.

[Juan Bejarano:]

Regarding your order value being higher, correct me if I am wrong, but I believe that you raised the minimum order size for free shipping. I think you supervise free shipping for orders over 35 or 39, and now its free shipping on orders over 49. Do you feel like that helps with the average order value?

[Menderes Akdag:]

We probably did.

[Juan Bejarano:]

Okay, so is that a strategy you will continue to do, I would assume?

[Menderes Akdag:]

We intend to keep it at $49 at this time.

[Juan Bejarano:]

Got it. And regarding acquisitions are you still considering making acquisitions or I believe at one point you were looking at pet clinics for potential acquisitions, is that still viewed as an opportunity or is that long past?

[Menderes Akdag:]

During the normal course of the business we do look at acquisition opportunities, but if something happens obviously we’ll let the market know.

[Operator:]

Next question is Mr. Kevin Ellich with Piper Jaffray.

[Kevin Ellich:]

Menderes just two quick follow-ups, one was kind of on the M&A I guess. Could you prioritize your use of cash given what guys have on the balance sheet in cash and short term? And then the second question was kind of looking at new customers and new customer sales which has been steadily declining over the last several quarters, when do you think that’s going to turn around and what’s it going to take for you guys to see some improvement in new customer sales.

[Menderes Akdag:]

All I can tell you is we are running a new campaign in our advertising and putting more emphasis on database marketing, and we’ll see what happens. Keep in mind that every customer does not have equal value. Also we are attempting to acquire higher valued customers.

[Kevin Ellich:]

Yeah, it sounds like you guys have been doing the database marketing and just focused for a while. Have you switched the focus on what you’re doing over the last several quarters? How has that changed over the last --?

[Menderes Akdag:]

Well I can tell you that our implementation is probably 80% down, but it’s going to be a 100% next [spring].

[Kevin Ellich:]

Okay. And how long has that being going on in terms of where you are at now of that 80% implementation?

[Menderes Akdag:]

About a year.

[Kevin Ellich:]

Okay. And then use of the cash, their capital.

[Menderes Akdag:]

Well as you know we pay dividends and we have still about I think $10 million remaining in our stock buyback. As far as M&A is concerned, we are not focused on it, but during the normal course of business when opportunities arise we will get them.

[Operator:]

At this time we have no additional questions in the queue. Now I’ll turn this meeting over to Mr. Akdag.

[Menderes Akdag:]

Thank you. For the remainder of fiscal year 2016, we are focusing on improving our marketing efforts to increase sales and profitability. This wraps up today’s conference call. Thank you for joining us. Operator this ends the conference call.

[Operator:]

Thank you for participating. You may now disconnect.