Petmed Express Inc (PETS) 2007 Q1 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 of the first fiscal quarter ended on June 30, 2007. At the request the Company, this conference 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, direct mail, and print advertising campaigns, which directs consumers to order by phone or on the Internet and aim 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.

I would like to welcome everybody here today. Before it in the call over to Mendo Akdag, our Chief Executive Officer and President, I would like to remind everyone that the first portion of this call will be listen-only 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 1985 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, 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 express or implied by these statements. We have identified various risk factors associated our operations in our most recent annual report and other filings with the Securities and Exchange Commission.

Now let me introduce today's speaker, Mendo 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 first fiscal quarter ended on June 30, 2007 to last year's quarter ended on June 30, 2006.

For the first fiscal quarter ended on June 30, 2007, sales were $59 million, compared to sales of $50.7 million for the same period the prior year, an increase of 16.5%. The increase was due to increased retail reorders and new orders, offset by decreased wholesale sales.

For the first fiscal quarter, net income was $6.2 million, or $0.25 diluted per share, compared to $4.8 million, or $0.20 diluted per share, for the same quarter last year, an increase to net income of 30%. Retail reorder sales increased by 18% to $40 million for the quarter, compared to reorder sales of $33.9 million for the same quarter the prior year. Retail new orders sales increased by 15% to $19 million for the quarter, compared to $16.5 million for the same quarter the prior year.

Wholesale sales were approximately $80,000 for the quarter compared to $270,000 for the same quarter last year. The decrease was due to our decision to reduce wholesale sales to focus on retail business.

We acquired approximately 236,000 new customers in our first fiscal quarter, compared to 207,000 for the same period the prior year. Our average retail order was approximately $84 for the quarter and approximately 64% of our sales were generated on our website for the quarter, compared to 59% for the same quarter the prior year. Our Internet sales for the quarter increased by 26% to $37.9 million for the quarter, compared to $30.1 million for the same quarter the 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 first fiscal quarter, our gross profit percentage as a percent of sales was 38.4%, compared to 39.7% for the same period a year ago. The percentage decrease can be attributed to increased product costs and freight costs, which we did not pass on to the consumer to be more price-competitive.

Our general and administrative expenses as a percent of sales were 9.5% for the first fiscal quarter, compared to 8.8% for the same quarter of the prior year. The approximate 65-basis-point increase can be attributed to the adoption of FIN 48 during the quarter. This resulted in approximately $386,000 of one-time uncollected sales tax expense in a state where for tax purposes it was determined that the Company had established a nexus

We spent $8.5 million in advertising for the quarter, compared to $8.3 million for the same quarter the prior year, an increase of 2%. Advertising costs of acquiring a customer for the quarter was approximately $36 compared to $40 for the same quarter the last year. We had higher response rates for our advertising campaigns for the quarter compared to the same quarter last year.

Regarding income tax provision, during the quarter it was determined that the Company was no longer a full taxpayer in the state of Florida due to the fact that nexus was established in another state. This event triggered the lower effective tax rate in the fiscal year ended March 31, 2007 and for the June quarter. Going forward, we are anticipating an estimated tax rate reduction of approximately 1.5% compared to the last fiscal year.

Our working capital increased by $4.9 million to $55.5 million since March 31, 2007. The increase can mainly be attributed to cash flow generated from operations.

We had $47.4 million in cash and temporary investments and $15.7 million in inventory with no debt as a June 30, 2007. Net cash from operations for the quarter was $9.5 million.

In accordance with our share repurchase program, we repurchased 117,300 shares, paying approximately $1.512 million during the quarter. Capital expenditures for the quarter were approximately $256,000.

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

(OPERATOR INSTRUCTIONS) Michael Cox, Piper Jaffray.

Congratulations on the quarter. My question is on the advertising spend being roughly flat year over year. Given the favorable ad environment, I'm curious why you did not choose to spend more this quarter versus last year, or was it a function of getting more for the incremental dollar spent this year?

We were conservative, especially with online advertising. We did not want to bring more traffic to our current website while we are in the process of transferring our website to a new platform, which will be more scalable and flexible.

So as we look to the back half of 2007 here, should we expect advertising spend to accelerate?

Not necessarily because, as you know, the current quarter is the highest sales quarter, so it may not have as much of an impact on our current website going forward. We may be a little bit more aggressive, but we will see how it goes.

Okay, that's fair. It has been a couple of quarter since we have seen the reorder growth drop below 20%. Anything of note in the quarter to consider there?

When reorders increase as a percent of total sales, the reorder growth will decrease. The matrix we use is reorders as a percent of prior year's total sales, which for the June quarter was 79% compared to 78% for the same quarter the prior year. The matrix, the math we do is $40 million in reorders divided by the total sales for June 2006 quarter, which was $50.7 million.

Okay, that makes sense. My last question as relates to the presidential election of 2008, I know we are a ways off, but I'm sure the campaigning will start up in earnest in early part of next year. Just curious what your thoughts are and your plans from advertising perspective as we move towards that season.

The state primaries it looks like will be consolidated into February and March of 2008. If the contests are close, there may be some impact on news stations. We do not anticipate any impact on other cable stations.

As far as the main elections are concerned, probably the heaviest impact will be in September and October of 2008. Again, news stations probably will be impacted, with some spillover some other stations. We're going to work around it. We're likely going to be more aggressive in online advertising.

Great, thanks a lot.

William Lennan, First Albany.

A pretty good slug of my questions just went away. I did want to know your thoughts on gross margin. Do you have a target gross margin where you just will stop being aggressive on pricing to meet whatever competition is driving it there, whether it's vets or online? Or another way to think about it is how much erosion should we be thinking about year over year for the rest of the year on the gross margin line?

We do not have a target gross profit percent. What we attempt to do is maximize the gross profit dollars. We price accordingly, so at the end the day, the consumers call the shots. It depends on how price-competitive -- price-sensitive the consumer is.

Thank you.

Michael Friedman, Noble Financial.

Just as a follow-up on that, you mentioned the consumer is going to make the call. Can you give a little more color? I mean, who was the most aggressive in competing with you on price during the quarter?

A vast majority of the consumers compare us to veterinarians, so the veterinarians are more price-competitive than in the past. They are matching our prices, but we are also finding out that convenience is just as important as price for the consumer.

Okay, then as far as G&A is concerned, should we look at the first quarter as an indicator as to what we should expect in subsequent quarters or is some of that a variable cost in there? Can you give us a little color on that?

There was a one-time charge, as I mentioned in my presentation. There was a one-time $386,000 charge due to a nexus which negatively impacted the G&A. I would expect about the same percent as a percent of sales as last fiscal year is what it appears like.

Okay. I think most everything else was already covered, so thank you.

(OPERATOR INSTRUCTIONS) Kristine Koerber, JMP Securities.

Just one quick question here. As far as -- you indicated that you saw good response to your ads. Could you just give us an idea is it television or online, kind of the mix of advertising in the quarter?

A majority was television. We had some online and print. As I mentioned, we were bit conservative in online advertising because we are in the process of transferring our website to a new platform.

Thank you.

Anthony Lebiedzinski, Sidoti & Company.

What is the timing of the transferring of the website?

Hopefully within weeks. We're hoping -- I thought it would have already been done by now, but I think we are weeks away, not months, at this time.

What will be the most significant new features of this website?

It will give us scalability, so we can hopefully bring as much traffic as we would like. And secondly, we'll have the flexibility to personalize the website. But to accomplish all that will take longer time, probably about six months, but we are testing now and hopefully will go live within weeks.

Okay, and the tax rate that you expect for the full year at 36.2%?

Somewhere around there, about 1.5% less than last fiscal year. I believe you're right, it was about 37.7% last year. That would be the impact of nexus. There may be other impacts which could impact it, but the impact of the nexus would be about 1.5%

Okay, and my last question is that every quarter you continue to build up cash. What are your priorities for usage of cash?

At this time, the stock repurchase plan is the priority.

Okay, thanks.

William Lennan, First Albany.

Just one follow-up on the gross margin I forgot to ask. Was there any material difference between gross margin on new orders and reorders and what should we expect going forward on that question?

No, there is no material difference.

Thank you.

(OPERATOR INSTRUCTIONS) at this time, I show no further questions.

We'll be focusing our efforts in three areas to capitalize on the pet industry's growth trends -- one, in 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 at this time. Thank you.