Petmed Express Inc (PETS) 2006 Q2 法說會逐字稿

Welcome to the PetMed Express Inc. doing business as 1-800-PetMed's conference call to review the financial results for the second fiscal quarter ended on September 30, 2006. 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, cats, and horses 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 1-800-PetMeds brand's name. 1-800-PetMeds provides an attractive alternative for obtaining pet medications in terms of convenience, price, ease of ordering, and rapid home delivering.

At this time I would now like to turn the call over to the Company's Chief Financial Officer, Mr. Bruce Rosenbloom.

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

Thank you, Bruce. Welcome, everyone. 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 on September 30, 2006 to last year's quarter and six months ended on September 30, 2005.

For the second fiscal quarter ended on September 30, 2006, our sales were $43.8 million compared to sales of $38.7 million for the same period the prior year, an increase of 13%. For the six months ended on September 30, 2006, sales were $94.5 million compared to sales of $82.3 million for the six months the prior year, an increase of 15%. The increase was primarily due to increased retail reorders offset by decreased wholesale sales.

For the second fiscal quarter, net income was $3.3 million or $0.14 diluted per share, compared to $2.7 million or $0.11 diluted per share for the same quarter the prior year, an increase to net income of 22%. For the six months net income was $8.1 million or $0.33 diluted per share compared to $6.3 million or $0.26 diluted per share a year ago, an increase to net income of 29%.

Retail reorder sales increased by 23% to $28.1 million for the quarter compared to retail reorder sales of $22.9 million for the same quarter the prior year. For the six months, the reorder sales increased by 28% to $62 million compared to $48.6 million for the same period last year.

Retail new order sales increased by 6% to $15.5 million for the quarter compared to $14.7 million for the same period the prior year. For the six months, the new order sales increased by 3% to $32 million compared to $31.1 million for the same period last year. The slowdown in retail new order sales growth may be attributable to increased advertising costs to acquire a new customer and increased price competition.

Wholesale sales were approximately $200,000 for the quarter compared to $1.1 million for the same quarter the prior year. For the six months, wholesale sales were approximately $500,000 compared to $2.5 million for the same period a year ago. The decrease was due to our decision to limit wholesale sales to focus on retail business.

We acquired 212,000 new customers in our second fiscal quarter compared to 208,000 for the same period the prior year. We acquired 419,000 new customers in the six months compared to 425,000 for the same period a year ago. Our average retail order was approximately $77 for the quarter compared to $74 for the same quarter the prior year. And approximately 62% of our sales were generated on our website for the quarter compared to 55% 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 seasons with fall and winter being the off seasons.

For the second fiscal quarter, our gross profit as a percent of sales was 38.6% compared to 38.4% for the same period a year ago. For the six months, our gross profit as a percent of sales was 39.2% compared to 38.5% for the six months a year ago. The percentage increase can mainly be attributed to decreases in wholesale sales, which have lower gross profit margin.

Our general and administrative expenses as a percent of sales were approximately 9.9% for both the second fiscal quarter and for the same quarter the prior year. And the G&A expenses as a percent of sales were 9.3% for both the six months ended September 30, 2006 and for the same six months the prior year.

The Company adapted financial accounting standard 123(R) on April 1, 2006, resulting in approximately $223,000 of stock option compensation expense for the quarter and $446,000 for the six months, which increased G&A as a percent of sales by 0.5% for the quarter and the six months.

For the quarter, we spent $7.7 million in advertising, compared to $6.9 million for the same quarter the prior year, an increase of 11%. For the six months we spent $16 million in advertising compared to $14.5 million a year ago, an increase of 10%. Advertising costs of acquiring a customer for the quarter was $36 compared to $33 for the same quarter the prior year. And for the six months, it was $38 compared to $34 for the same period a year ago.

Our working capital increased by $8.9 million to $43.9 million since March 31, 2006. The increase can mainly be attributed to cash flow generated from operations. We had $37.7 million in cash and $9.9 million in inventory with no debt as of September 30, 2006. Net cash from operations for the six months was $14.2 million compared to $12.7 million for the same period the prior year, an increase of $1.5 million. Capital expenditures for the six months were approximately $300,000.

This ends the financial review. Operator, we are ready to take questions.

(OPERATOR INSTRUCTIONS) Frank Gristina, Avondale.

Bruce, I was hoping you could break out the different revenue lines, new reorder, wholesale, just so -- on the surface it seemed like maybe the new order business was down, but it is actually the wholesale business that caused the year-over-year decline and I guess the delta between total revenue and reorder revenue?

On total sales for the quarter?

Yes, please.

The new orders was $15.5 million, reorders $28.1 million. Wholesale was approximately $200,000.

Then in terms of can you give us an update what's going on in the advertising environment? Do you feel like -- $36 CAC, 8% inflation is not too bad. Do you feel like you saw some political pressure there or how did you manage to keep that inflation down to single digits?

It was really not as bad as we anticipated, the bottom-line answer is.

Is it dissipating now or through November we will see less pressure?

It was not as bad the first two weeks of October. Obviously we have two more weeks to go, so it may tighten up a little bit. Bear in mind that it is our off-season.

Okay. The last thing is what is the driver of retail reorder sales, so up 23%? Is it new products in the basket? Is it some pricing? What is driving that strong number?

Continued strong communication with our database (multiple speakers).

So a lot of direct marketing via e-mail?

Refills, upsells, and cross selling, through both e-mail and direct-mail.

And cross selling, what exactly -- does that mean you're getting them to buy a new product, something they did not buy before, so they are going from Frontline and Heartgard to a bone and joint medicine or is that cross selling?

I would say so, but more vitamins, nutritional supplements, toys, shampoo, conditioner, skincare.

Great. Thanks a lot. I'll get back in the queue.

Markos Kaminis, Kaminis Capital.

I have a couple, two questions. First question is regarding the wholesale business. I'm sorry, I missed the prior year number for that.

The prior year for the quarter was $1.1 million and the current September quarter was $200,000.

Okay, so it this a run rate, this $200,000 level, that you're going to probably stick with? And when will the comp numbers start to reflect -- when will this be out of your comps?

I think by next fiscal year it should be out of the comps.

You have now -- let's see, it affected last quarter, affected this quarter. Is it going to affect the coming quarter?

Hold on one second. Possibly yes, it will. As of the March quarter, so we have two more quarters to go that it will impact it. After that it will be out.

That's helpful. It feels like it is an economic value add anyway in the long run. The other question I have now is what are your plans for the use of cash? You have a nice cash store building up. You have a share repurchase plan, pretty large share repurchase plan passed through the Board. Are you thinking you might acquire smaller competitors or are you going to buy back shares? What's your plans?

We do not have a stock buyback plan approved by the Board.

You don't?

That is not us.

Would you consider buying back shares? Are you planning to maybe buy up some lists of smaller competitors?

The Board is considering all options including stock buyback, dividends, and acquisitions, so when and if the Board makes the decision, obviously we will let the public know.

Right, but what do you view as more valuable?

Me personally? Probably stock buyback.

Okay, thank you.

Anthony Lebiedzinski, Sidoti & Co.

A couple of questions. Have you made any changes to your advertising strategy? And also is the mix of cable TV commercials still the same or are you doing a little bit more perhaps online advertising?

We are probably doing a little bit more online advertising. We really have not made any strategic changes except probably our creatives. We are coming out with new creatives for the -- which will probably start running in January that we are excited about. Other than that, we track all our advertising and whatever is obviously paying off we will continue with that.

As far as the gross margin, you had mentioned that the bulk of it was, the bulk of the gross margin expansion was because of the wholesale revenue coming down. And now as you strip out the wholesale component, what was the gross margin then?

It was very similar to last year probably 0.1% difference.

Okay. Lastly, as far as the average order size, it did increase this quarter versus last year. What would you attribute that to?

I would say about 60% is due to price increases passing the cost increases to the consumer and the other 40% up selling and cross selling.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Kristine Koerber, JMP.

Can you give us a little more color on pricing? I know you said you were competitive on pricing during the quarter, kind of what you're seeing out there and what you saw in the environment during the quarter? Are we seeing more competitors heating up the discounting?

We really look at veterinarians. The market share is coming from the veterinarians. So we compare ourselves to veterinarians and they have been more price competitive.

Has it been a lot? Are we talking 5, 10%? How much more aggressive were you during the quarter?

It is a highly fragmented market. There are about 20,000 veterinary practices, so there are a lot of prices out there. On average what we charge, on average we save the consumer about 10 to 15% I would say. Bear in mind that we have free shipping, free priority shipping we offer on orders over $39, which the majority of the orders qualify.

Michael Friedman, Noble Financial.

Actually most of my questions have been answered. Just a question on the inventory actually, is there -- are you finding it easier or harder to get inventory, about the same? Can you just give us a little color on that?

I would say it is about the same. It has not changed.

Okay, thanks.

(OPERATOR INSTRUCTIONS) We are showing no further questions on the phone line. We'll turn it back over to you, sir, for further comments.

Thank you. We will be focusing our efforts in three areas to capitalize on the pet industry's growth trends. One, optimizing our advertising media buys and creative to capture additional market share. Two, personalized communication and health education content to build value for our customers, to increase loyalty and to differentiate our brand and help our customers choose the right products for their pet's condition and three, improving our current service levels.

This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call.

Very good, thank you. This concludes today's conference call. We thank you for your participation. You may disconnect at this time.