PetMed Express, Inc.
Q4 2015 Earnings Call Transcript

Published: 9 May 2016

[Operator:]

Welcome to the PetMed Express Incorporated doing business as 1-800-PetMeds Conference Call to review the Financial Results for the Fourth Fiscal Quarter that ended on March 31, 2016. 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’d like to turn the call over to the Company’s Chief Financial Officer, Mr. Bruce Rosenbloom.

[Bruce Rosenbloom:]

Thank you. I’d like to welcome everybody here today. Before I turn the call over to Menderes Akdag, our President and Chief Executive Officer, I’d 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’ve 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, President and Chief Executive Officer of 1-800-PetMeds. Mendo?

[Menderes Akdag:]

Thank you, Bruce. Welcome everyone. Thank you for joining us. Today we will review the highlights of our financial results. We will compare our fourth fiscal quarter and fiscal year ended on March 31, 2016 to last year’s quarter of fiscal year ended on March 31, 2015. For the four fiscal quarter ended on March 31, 2016, our sales were $55.4 million compared to sales of $50 million for the same period the prior year, an increase of 11%. For the fiscal year ended on March 31, 2016, sales were $234.7 million compared to $229.4 million for the prior fiscal year, an increase of 2.3%. The increase in sales for the quarter was due to increases in new order and reorder sales. The average order value was approximately $83 for the quarter compared to $81 for the same quarter the prior year. For the four fiscal quarter net income was $5.4 million, or $0.27 diluted per share compared to $5 million or $0.25 diluted per share for the same quarter the prior year, an increase to net income of 9.4%. For the fiscal year, net income was $20.6 million, or $1.02 diluted per share compared to excluding a one-time charge for an IT related discontinued project $18.5 million, or $0.92 diluted per share a year-ago, an increase to net income of 11%. Reorder sales increased by 8.4% to $46 million for the quarter compared to reorder sales of $42.5 million for the same quarter the prior year. For the fiscal year, reorder sales increased by 3.1% to $195.6 million compared to $189.7 million for the prior year. Reorder sales increased by 24% to $9.4 million for the quarter compared to $7.5 million for the same period the prior year. For the fiscal year, reorder sales decreased by 1.5% to $39.1 million compared to $39.7 million for the prior year. We acquired approximately 116,000 new customers in our fourth fiscal quarter, compared to 97,000 for the same period the prior year. And we acquired approximately 489,000 new customers in the fiscal year compared to 529,000 for the prior year. For the quarter, approximately 82% of our sales were generated on our Web site compared to 81% 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 are considered peak season with fall and winter being the off season. For the fourth fiscal quarter, our gross profit as a percentage of sales was 31.9% compared to 33.9% for the same period a year-ago. For the fiscal year, our gross profit as a percent of sales was 32.5% compared to 33.2% for the prior year. The percentage decrease for the quarter can mainly be attributed to additional discounts given to customers to increase sales. Our general and administrative expenses as a percent of sales was 9.3% for the quarter, compared to 9.8% for the same quarter the prior year, and for the fiscal year it was 9.1% compared to 9.2% for the prior year. We were able to leverage G&A with increased sales. For the quarter, we spent $3.7 million in advertising, compared to $4 million for the same quarter the prior year, a decrease of about 8%. For the fiscal year, our spending was $21.8 million for advertising, compared to $25.2 million for the prior fiscal year, a decrease of about 13%. Advertising costs of acquiring a customer for the quarter was approximately $32 compared to $42 for the same quarter the prior year, and for the fiscal year, it was $45 compared to $48 for the prior fiscal year. We had $37.6 million in cash and cash equivalents and $25.6 million in inventory with no debt as of March 31, 2016. Net cash from operations for the fiscal year was $21.1 million compared to $32 million for the prior fiscal year. The majority of the decrease was due to a reduction in inventory in the prior fiscal year. Capital expenditures were $20.1 million for the fiscal year including the purchase of the property for $18.5 million during the March quarter. This ends the financial review. Operator we’re ready to take questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Speakers, we’ve our first question coming from the line of Mr. [indiscernible] of Credit Suisse. Sir, your line is now open.

[Unidentified Analyst:]

Hi. [Indiscernible] here. The changes in advertising strategy here, was there anything significant that you would note that helped to contribute to the new order sales in the quarter?

[Menderes Akdag:]

All I can tell you is we tweak the model and it’s more efficient. We moved from mass marketing to a more targeted marketing.

[Unidentified Analyst:]

Okay, great. And then, are you seeing at all a positive impact from disruption across the marketplace with some consolidation with some of your competitors like Drs. Foster & Smith? Is that helping you at all?

[Menderes Akdag:]

It’s difficult to tell. It’s possible.

[Unidentified Analyst:]

Okay. Do you run into those competitors frequently? I mean, how [multiple speakers]?

[Menderes Akdag:]

We do.

[Unidentified Analyst:]

And then, I guess, what types of products are you seeing an uplift in, particularly, just given the warmer weather?

[Menderes Akdag:]

The demand was high -- higher I should say for the flea and tick category in the March quarter, which positively impacted both new orders and reorders.

[Unidentified Analyst:]

Okay. And lastly on the gross margin trend, was there -- would make some meaningful factor there and how should we think about the quarterly progression of that metric going forward?

[Menderes Akdag:]

We anticipate continuing pressure on the gross profit margins, but we may be able to make it up on the advertising line.

[Unidentified Analyst:]

Okay. All right. Thank you.

[Menderes Akdag:]

You’re welcome.

[Operator:]

Thank you. Our next question coming from the line of Mr. Mitch Bartlett of Craig-Hallum. Sir, your line is now open.

[Mitchell Bartlett:]

Sure. Thank you. Mendo, maybe you could expand on the comments you just talked about as moving from mass marketing to more targeted marketing. First, what is that? I mean, can you just give us a practical explanation of what’s going on there? And how do you reach new customers with more targeted marketing and growth at efficiently? And you just said that, perhaps this is a -- that you might be lowering prices going forward or keeping prices low and the trade-off with the advertising costs? Maybe you can expand on that a little bit more.

[Menderes Akdag:]

Okay. With mass marketing what I refer to is probably television advertising.

[Mitchell Bartlett:]

Okay.

[Menderes Akdag:]

It would be a mass advertising, so we’re reducing that and getting more targeted. So, if you target obviously the right customer, so we tweaked the model and currently -- obviously it worked better in the last two quarters.

[Mitchell Bartlett:]

But what do you mean by targeting those is the question?

[Menderes Akdag:]

It’s more targeted marketing.

[Mitchell Bartlett:]

Okay.

[Menderes Akdag:]

I’m going to leave it at that. I’m not going to give you any specifics due to competitive reasons.

[Mitchell Bartlett:]

It’s more direct mail or something like that. Okay.

[Menderes Akdag:]

It could be. I mean, I’m not going to get into specifics. We have too many copy cats, so.

[Mitchell Bartlett:]

And that leverages new customer growth as well?

[Menderes Akdag:]

Well it did. So, I mean, [indiscernible] number speak for themselves. So you can draw your own conclusions.

[Mitchell Bartlett:]

Okay. And then the second question would be, last quarter I thought we kind of burrowed forward on flea and tick because of an unseasonably warm, and here it happened again this quarter which is wonderful. Is that -- do you see a change in the flea and tick in the winter months, or have -- maybe you could go through that?

[Menderes Akdag:]

Well, the demand for the flea and tick category was higher both in the March quarter and the December quarter obviously which positively impacted sales. So the weather most likely played a role in that.

[Mitchell Bartlett:]

Okay. Thank you.

[Menderes Akdag:]

You are welcome.

[Operator:]

Thank you. Our next question is coming from the line of Mr. Anthony Lebiedzinski of Sidoti & Company. Sir, your line is now open.

[Anthony Lebiedzinski:]

Good morning. Thank you for taking the questions. So first off, is it possible for you, Mendo, to quantify the impact of the warmer weather? How much do you think you got as a result of people buying more flea and tick medications because of the warmer weather?

[Menderes Akdag:]

We’ll be guessing and speculating which I’m not going to get into.

[Anthony Lebiedzinski:]

Okay. And also, could you give us a mix of business between over the counter and prescriptions for the year and for the quarter, if you can?

[Menderes Akdag:]

We will discontinue giving that information due to competitive reasons.

[Anthony Lebiedzinski:]

Okay. All right. Okay, and then the other question that I had was, so it sounds like really because of your shift away from TV that the presidential election probably won't have too much of an impact on your advertising?

[Menderes Akdag:]

That’s a fair assumption. Yes.

[Anthony Lebiedzinski:]

Okay. So, and just continuing on the advertising topic. So obviously you did a good job of managing your expenses down 8% in the quarter, it’s down 13% for the year. That being said, I mean, how much further can you take down advertising? I mean, is it fair to say that these types of decreases in advertising are not sustainable?

[Menderes Akdag:]

That’s probably accurate. Yes, maybe in the June and September quarter we may be able to, but after that obviously comparison gets much tougher. So, I would say it would not be sustainable maybe in the long run, but in the short run it maybe.

[Anthony Lebiedzinski:]

Okay. All right. Thank you.

[Menderes Akdag:]

You are welcome.

[Operator:]

Thank you. [Operator Instructions] Speakers, your next question is coming from the line of Mr. Michael Kupinski of Noble Financial. Sir, your line is now open.

[Michael Kupinski:]

Thank you. Thanks for taking the question. My question more is a little bit more broad; obviously in the flea and tick category we had movement towards generics in non-prescription. And I’m wondering if, in the flea and tick category, are we starting to see a shift back towards prescription flea and tick medications, and if you could just talk a little bit about market share shifts towards that type of product, if you have covenants [ph]?

[Menderes Akdag:]

The new products are all prescription. So I’m not sure where you are getting your information that a move to OTC, so there was not very many. There was actually no prescription on flea -- just flea and tick category in the past, now there is. So, there is …

[Michael Kupinski:]

Right, that’s what I’m saying. That’s what I’m referring to. So, I’m just asking, what type of share shifts we’re seeing in terms of flea and tick prescription drugs?

[Menderes Akdag:]

Again due to competitive reasons I’m not going to give you any data points on that.

[Michael Kupinski:]

And that’s all I have. Thank you.

[Menderes Akdag:]

You are welcome.

[Operator:]

Thank you. Next question is coming from the line of Mitchell Bartlett of Craig-Hallum. Your line is now open.

[Mitchell Bartlett:]

Mendo, I understand why you don’t have to kind of talk too much in detail about your components of your advertising strategy. So maybe, I can just frame it this way. In the fourth quarter of fiscal 2012, you had about the same level of sales. Advertising was $6.9 million, 12.4% of sales, and this year it was 6.7%, or roughly half at that level. Is the shift or could you look at that $6.9 million and say, TV based advertising was three quarters of it, now its one quarter or could you kind of compare the two and say what has changed in the magnitude of the shift between the channels rather than delineating what you’re doing with the channels?

[Menderes Akdag:]

It’s probably possible to do that, yes. It’s not going to be a 100% accurate. But yes. It may give you some idea.

[Mitchell Bartlett:]

Well, that’s my question to you. I mean, was TV significantly higher percentage back then, and could you quantify that percentage?

[Menderes Akdag:]

Yes, it was significantly high percentage back then. I’m not going to quantify it.

[Mitchell Bartlett:]

Okay. Fair enough. Thank you.

[Menderes Akdag:]

You are welcome.

[Operator:]

Thank you. At this time there are no further questions. I would now like to hand the call over to Mr. Akdag.

[Menderes Akdag:]

Thank you. In fiscal 2017, we’ll be preparing to move into our new corporate headquarters and distribution center which is expected to occur in our third fiscal quarter. 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.