Petmed Express Inc (PETS) 2006 Q3 法說會逐字稿

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, 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 nonprescription 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, and direct-mail advertising campaigns which direct consumers to order by phone or on the Internet to increase their recognition of the 1-800-PetMeds brand name. 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 go ahead please.

Thank you. I would like to welcome everyone here today. 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 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 risk, 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.

Welcome and thank you for joining us today. We will review the highlights of our financial results, and we will compare our third quarter and nine months ended on December 31, 2006, to last year's quarter and nine months ended on December 31, 2005.

For the third fiscal quarter ended on December 31, 2006, sales were $31.4 million compared to sales of $25.9 million for the same period the prior year, an increase of 21%. For the nine months ended on December 31, 2006, sales were $125.8 million compared to sales of $108.2 million for the nine months of the prior year, an increase of 16%. The increase was primarily due to increased retail reorders and new orders, offset by decreased wholesale sales.

For the third quarter, net income was $2.8 million or $0.11 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 3%. For the nine months net income was $10.8 million or $0.44 diluted per share compared to $8.9 million or $0.37 diluted per share a year ago, an increase to net income of 21%.

Retail reorder sales increased by 22% to $22.1 million for the quarter compared to reorder sales of $11.1 million for the same quarter the prior year -- $18.1 million for the same quarter the prior year. For the nine months the reorder sales increased by 26% to $84.1 million compared to $66.7 million for the same period a year ago.

Retail new order sales increased by 27% or $9.2 million for the quarter compared to $7.3 million for the same period the prior year. For the nine months, the new order sales increased by 7% or $41.2 million compared to $38.4 million for the same period last year.

Wholesale sales were approximately $70,000 for the quarter compared to $500,000 for the same quarter the prior year. For the nine months wholesale sales were approximately $500,000 compared to $3.1 million for the same period a year ago. The decrease was due to our decision to limit wholesale sales, to focus on our retail business.

We acquired approximately 130,000 new customers in the third quarter compared to 105,000 for the same period the prior year. We acquired approximately 550,000 new customers in the nine months compared to 530,000 for the same period a year ago.

Our average retail order was approximately $75 for the quarter compared to $74 for the same quarter the prior year, and approximately 63% of our sales were generated on our website for the quarter compared to 57% 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 the fall and winter being the off-seasons.

For the third fiscal quarter our gross profit as a percentage of sales was 40.8% compared to 39.7% for the same period a year ago. For the nine months our gross profit as a percentage of sales was 39.6% compared to 38.8% for the nine months a year ago. The percentage increase can mainly be attributed to decreases in wholesale sales, which have lower gross profit margins, and a shift in our product mix to higher-margin items.

Our general and administrative expenses as a percentage of sales increased to 12.8% for the quarter compared to 11.8% for the same quarter the prior year. For the nine months the G&A increased to 10.2% compared to 9.9% a year ago.

The company adopted FAS 123(R) on April 1, 2006, resulting in approximately $223,000 of stock option compensation expense for the quarter and $[669,000] for the nine months, which increased general and administrative expenses as a percentage of sales by 0.7% for the quarter and 0.5% for the nine months. For the quarter we maintained higher staff levels than we usually do during our off-season or our off-peak season, in an effort to ensure that we have experienced staff that will be able to offer better service during our upcoming peak season.

For the quarter we spent $4.8 million in advertising compared to $3.2 million for the same quarter the prior year, an increase of 50%. For the nine months we spent $20.8 million for advertising compared to $17.7 million a year ago, an increase of 17%. Advertising costs of acquiring a customer for the quarter was approximately $37 compared to $30 for the same quarter the prior year. For the nine months, it was $38 compared to $33 for the same period a year ago. We were more aggressive to capture market share during the quarter compared to the same quarter the prior year.

Our working capital increased by $11.6 million to $46.6 million since March 31, 2006. The increase can mainly be attributed to cash flow generated from operations. We had $38.2 million in cash, $10 million in inventory, and with no debt as of December 31, 2006. Net cash from operations for the nine months was $15.1 million compared to net cash from operations of $13.5 million for the same period last year, an increase of $1.6 million.

Capital expenditures for the nine months were approximately $824,000. This ends the financial review. Operator, we are ready to take questions now.

(OPERATOR INSTRUCTIONS) Michael Cox, Piper Jaffray.

My first question is on the advertising environment through your fiscal third quarter. Obviously you went through the election period. I was just wondering if you could comment on the ad environment leading up to the election and then coming out of that election.

This is Mendo Akdag, by the way. The advertising environment was actually better than we anticipated. We cleared more than we anticipated. So as you could see we spent a lot more money, about 50% more, for the quarter compared to last year's same quarter. We were more aggressive to capture market share.

AS we look forward should we expect the same level of aggressiveness moving towards market share, in terms of ad spend moving higher at that same rate?

Likely yes. We will be more aggressive.

Okay. I was wondering if you could give an early read on the new ad campaign that you launched at the start of this year.

It is a little too soon to tell, but we are cautiously optimistic.

Okay. My last question is on your share buyback. It doesn't look like there was any activity in the course of the quarter. I was just wondering, in terms of timing, if we should expect you to be more aggressive here in your fiscal fourth quarter.

We have not done any purchasing in the quarter. It is really up to the Company -- it is at the Company's discretion and it is subject to market conditions. There is a committee that decides that. So obviously if any transaction takes place we will let the public know.

Michael Friedman, Noble Financial.

Going back to the spokesperson issue, is there a reason why you brought somebody on, Betty White, now? I mean is there something in the market that sparked that decision? Can you give us a little more color on that?

Obviously we want to improve the efficiency of our advertising, so we want to get more response. That is one of the things obviously we could do, is hire a celebrity as a spokesperson. That is what we have done.

But why now? Does that indicate that it is tougher to acquire new customers? I mean is there a particular reason? Or you just feel that this is the right moment to move into that phase?

Well, if you look at our nine-months' growth, it is 16%; so we'd like to grow higher than that. So that was one of the factors in the decision.

You mentioned you're going to be a little bit more aggressive on the advertising spend. Can you give us a time frame? Is that the next -- this current quarter or the next several quarters? Can you just give us just a little more color on that?

I can tell you that in the next, I would say, probably three quarters we are going to be more aggressive than we have been in the last year.

So would it be fair to say that year-over-year advertising spend may be up 50%? Is that what you're saying? Or would it be --?

That is a little too aggressive. I would not expect 50%; no.

Can you give us a little bit -- can you narrow it down a little bit more for us? What are you guys (multiple speakers)?

I prefer not to. We have flexible budgets; and depending on the market conditions we like to have the flexibility. So I prefer not to give you any numbers.

Okay. I will get back in the queue. Thank you.

Rusty Hoss, Roth Capital Partners.

Can you maybe talk a little bit about the customer acquisition channel in terms of the split between television -- obviously that is still the majority -- but also what you might be doing on the Internet? Online advertising and also other traditional sources of advertising to acquire customers.

The majority of the money we spend on TV. Online is second, probably. We do paid searches, affiliate programs. We do have banner ads all over the Web. We do have some print and direct mail presence. We don't like to break it down due to competitive reasons. I prefer not to give you any further detail.

But when you talk about being more aggressive in advertising, is it going to be split across those channels? Or is one channel going to be more the focus?

Television and online I would say.

Okay. Second question is on the retail reorder versus new order. The reorder was pretty constant with where it was last year; but the reorder was about 10 points higher. I am wondering, as we look at the next couple quarters, should we assume that some of those new order sales will then become repeat orders, and therefore there will be a shift back to a retail reorder higher growth rate?

Of course as we have a larger customer base, re-orders should go up. It depends on again how much money we are spending in advertising to acquire new customers. Will dictate the mix.

Kristine Koerber, JMP Securities.

Can you just talk about the competitive environment? Was there a lot of discounting going on during the quarter?

Then also you mentioned G&A up because of higher staff levels. Was that most of the G&A increase in -- I am assuming we can expect continued increase in G&A going forward, correct?

Typically off-season, our December quarter, there is less competition actually because it is off-season. It is -- more of the market is a lot more competitive during our peak season, which is the June and September quarters.

As far as the G&A, we carry at higher staff level than we usually do; and the reason for that was that we wanted to have experienced staff, less turnover, so we can be able to service the customer better during our peak season.

But we are at a higher base now. So we should assume that going forward, then, on the G&A; or do you pull back?

That means there will be more -- [no] more fixed than variable. That's what it means.

(OPERATOR INSTRUCTIONS) Anthony Lebiedzinski, with the Principal Global Investors.

This is Anthony Lebiedzinski from Sidoti & Company. A couple of questions. In regards to the last question, I had a follow-up. The G&A expenses, are you from now on more committed to providing higher staff levels to get more service? So is it right to assume that you're going to be carrying more G&A going forward than you have in the past? Is that a change in strategy, so that we should expect that G&A expenses will be trending higher?

It would be trending higher during our off-seasons. It shouldn't be trending higher during our peak season.

Got it. Okay, that's helpful. Then as far as the advertising environment, maybe you can give us a sense of how that is now (technical difficulty). Also, how do you expect new customer acquisition cost to be trending over the next few quarters?

It is really too soon to tell as far as the current quarter is concerned. We are anticipating a little better advertising environment, more favorable to direct-response advertisers this year. Having said that, you never know. I have been surprised before.

Okay. As far as the CapEx, that has gone up quite a bit over this year. Where do you see that for the entire year, and any early read as to the next fiscal year as far as CapEx?

The reason the CapEx is up we are working on a new e-commerce platform, and there is a one-time investment there. I think it is going to be about probably a $1 million range. We have I believe another $400,000 to $500,000 possibly to spend on it. Next year it will be more maintenance mode; I would say $300,000 to $500,000.

That's helpful. Thank you.

John Curti, Principal Global Investors.

My question has to do with gross margins. I was wondering if you could isolate the impact, the positive impact, of having lower wholesale sales on gross margins; as well as the impact of a shift to higher-margin products. I'm trying to get a little better understanding there how the mix plays out.

Sure. For the quarter the wholesale impact was 40 basis points. So the rest was a change, a shift in product mix. For the nine months the wholesale impact was 50 basis points. So the difference, the 30 basis points, was due to shift in product mix.

What was it again for the nine months? I'm sorry. 50 basis points?

50 basis points was due to decrease in wholesale.

Could you talk a little bit more about, then, what is going on with the mix shift, then? Do you anticipate that that is going to continue?

We will attempt that. Ultimately obviously the consumer decides. We will we will attempt that. But during peak season I would anticipate pressures in the gross profit margin.

I would like turn the call over to Mr. Bruce Rosenbloom for any closing statements, please.

Thank you. We will be focusing on efforts in three areas to capitalize on the pet industry's growth trend. One, capturing additional market share; two, increasing reorders with personalized communication and health education content; 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.

Thank you. This concludes today's teleconference. Thank you for your participation. You may disconnect. Thank you.