PetMed Express, Inc.
Q3 2014 Earnings Call Transcript

Published: 20 Jan 2015

[Operator:]

Welcome to the PetMed Express, Inc., doing business as 1-800-PetMeds, Conference Call to review the Financial Results for the Third Fiscal Quarter ended on December 31, 2014. 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 direct 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.

[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, President and Chief Executive Officer of 1-800-PetMeds. Menderes? [2

[Menderes Akdag:]

Thank you, Bruce. Welcome everyone. Thank you for joining us. Today, we will review the highlights of our financial results. We'll compare our third fiscal quarter and nine months ended on December 31, 2014 to last year's quarter and nine months ended on December 31, 2013. For the third fiscal quarter ended on December 31, 2014, sales were $49.3 million compared to sales of $50.1 million for the same period the prior year, a decrease of 1.6%. For the nine months ended on December 31, 2014, sales were $179.4 million, compared to sales of $184.8 million for the nine months the prior year, a decrease of 2.9%. The decreases in sales were due to decreases in new order and reorder sales. The average order value for the quarter was approximately $76 compared to $72 for the same quarter the prior year. For the third fiscal quarter, net income was $4.8 million or $0.24 diluted per share, compared to $4.5 million or $0.23 diluted per share for the same quarter of the prior year, an increase to net income of 5.6%. For the nine months, excluding a one-time charge for an IT-related discontinued project in the September quarter, net income was $13.6 million or $0.67 diluted per share, compared to $13.4 million or $0.67 diluted per share a year ago; an increase to net income of 1%. The one-time IT-related discontinued project charge in the September quarter was $1.7 million before taxes, and the net after-tax impact of this charge was $1.1 million or $0.05 diluted per share. Reorder sales decreased slightly to $42.2 million for the quarter compared to reorder sales of $42.4 million for the same quarter the prior year. For the nine months, the reorder sales decreased by 2% to $147.2 million compared to $150.2 million for the same period a year ago. New order sales decreased by 7.5% to $7.1 million for the quarter compared to $7.7 million for the same period the prior year. For the nine months, the new order sales decreased by 6.9% to $32.2 million compared to $34.5 million for the same period last year. The decreases were mainly due to increase in customer acquisition costs. We acquired approximately 96,000 new customers in our third fiscal quarter compared to 114,000 for the same period of the prior year, and we acquired approximately 430,000 new customers in the nine months compared to 490,000 for the same period a year ago. For the quarter, approximately 80% of our sales were generated on our Web site compared to 79% for the same quarter last 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 seasons with fall and winter being the off-season. For the third fiscal quarter, our gross profit as a percent of sales was 34.7% compared to 33.7% for the same period a year ago. For the nine months, our gross profit as a percent of sales was 33.1% compared to 32.6% for the nine months a year ago. The percentage increases can be attributed to a shift in sales to higher margin items. Our general and administrative expenses were lowered by $160,000 for the quarter, and about $280,000 for the nine months compared to the same period the last year. For the quarter, we spent $4.3 million in advertising compared to $4.5 million for the same quarter the prior year. For the nine months, we spent $21.1 million for advertising compared to $21.9 million for the nine months the prior year. Advertising cost of acquiring a customer for the quarter was $45 compared to $40 for the same quarter of the prior year, and for the nine months it was $49 compared to $45 for the same period a year ago. The increases were mainly due to advertising cost increases. We had $52.6 million in cash and short-term investments, and $21.6 million in inventory with no debt as of December 31, 2014. Net cash from operations for the nine months was $29.5 million compared to $17.7 million for the nine months the prior year. The increase was mainly due to a reduction in inventory and prepaid expenses. 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] One moment please for the first question. Our first question comes from Mr. Kevin Ellich from Piper Jaffray. Sir, your line is open. You may now begin.

[Colin Clark:]

Hi, this is Colin Clark on for Kevin Ellich. I'm wondering if you can give us any more detail on the advertising costs [Indiscernible] down? Last quarter, you mentioned that cost per impression were up mid to high single-digit, and that the TV online were up across the board. I'm just wondering if you see any changes there going forward.

[Menderes Akdag:]

We're anticipating that cost per impression going forward is going to go up mid-single-digits.

[Colin Clark:]

Okay, got it. Just one more follow-up; I'm wondering if you can give us any more details on the improved marketing and database efforts? You mentioned a full implementation last quarter coming in the spring; just wondering if that timing is still on track.

[Menderes Akdag:]

That timing is still on track, yes.

[Colin Clark:]

All right, thank you.

[Menderes Akdag:]

You're welcome.

[Operator:]

Thank you, sir. Our next question comes from Mr. Anthony Lebiedzinski from Sidoti.

[Anthony Lebiedzinski:]

Yes, good morning. This is Anthony Lebiedzinski from Sidoti. Looking at the gross margin, definitely an impressive improvement, up 98 basis points; can you just give us a sense as to whether this was mostly driven by an increase in your prescription business? If that's the case, how sustainable are these trends?

[Menderes Akdag:]

Sales shifted to higher margin items. It's going to depend on the sales mix going forward if we can sustain it or not.

[Anthony Lebiedzinski:]

Okay. And looking at your comment about the focusing on improving your marketing efforts to increase sales -- are there any new initiatives under way? Can you give us some more color about this, please?

[Menderes Akdag:]

We will be running some new campaigns. Actually, we're currently running a new creative. And also we will put more emphasis on database marketing, but I'm not going to get into specifics due to competitive reasons.

[Anthony Lebiedzinski:]

Okay, that's understandable. And just wondering as far as the AOV, what drove that AOV increase? Can you give us some examples, please?

[Menderes Akdag:]

Sales shifted to higher priced items was the main reason for increase. Also, there were some higher quantities purchased.

[Anthony Lebiedzinski:]

Okay. So, in other words, did you see more people buying, let's say, six packs of flea and tick medications versus three packs the year before? Is that a good example?

[Menderes Akdag:]

Yes.

[Anthony Lebiedzinski:]

Okay. All right, thanks a lot.

[Menderes Akdag:]

You're welcome.

[Operator:]

Thank you, sir. [Operator Instructions] Okay. And now I'll turn the meeting over to -- oh, one moment please. Our next question comes from Mitch Bartlett from Craig-Hallum. Ma'am, your line is open. You may now begin.

[Mitchell Bartlett:]

Hi, good morning. It seems like so much of the conversation is about the mix shift more to prescription, away from OTC, and how that is supporting numbers, despite customer counts that are down, order counts that are down, things like that. Has there been a change in the way you go after a customer? Did, in the past, you lead with a flea and tick, and convert them into a prescription; now you go hard for a prescription customer? Perhaps that's why the cost of customer acquisition is going up, because that's a more valuable customer? Maybe you could just talk to us about the strategy around the mix shift, and how you are positioning the company.

[Menderes Akdag:]

I can tell you that there has been some change in the last, I'd say one year. Obviously, we're going after the more profitable sale, and where there is less competition.

[Mitchell Bartlett:]

Got it. Does that mean the media advertising has changed -- the mix of media has changed, or…?

[Menderes Akdag:]

No, no, it has not changed much. If it changed, it would change due to the cost, not necessarily us driving it.

[Mitchell Bartlett:]

Okay, thank you.

[Operator:]

Thank you, sir. I will now turn the meeting over to Mr. Akdag. Sir, you may begin.

[Menderes Akdag:]

Going forward, we're focusing on improving our marketing efforts to increase sale. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call.

[Operator:]

And that concludes today's conference. Thank you for participating. You may now disconnect.