Petmed Express Inc (PETS) 2007 Q2 法說會逐字稿

Good morning and welcome to the PetMed Express Inc. doing their business as 1-800-PetMeds conference call for the review of the financial results for the second fiscal quarter ending on September 30, 2007. At the request of the Company, this conference is being recorded.

Founded in 1996, 1-800-PetMeds is America's largest pet pharmacy delivering prescriptions and nonprescription pet medications and other health products for dogs, cats, 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 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'd like to turn the call over to the Company's Chief Financial Officer, Mr. Bruce Rosenbloom.

Thank you. Good morning. I would like to welcome everybody here today. Before I turn the call over to Mendo 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 her most recent and 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. Mendo?

Thank you, Bruce. Welcome everyone. Thank you for joining us. Today we will review the highlights of our financial results; we'll compare our second fiscal quarter and six months ended on September 30, 2007 to last year's quarter and six months ended on September 30, 2006.

For the second fiscal quarter ended on September 30, 2007, sales were $51.5 million, compared to sales of $43.8 million for the same period the prior year, an increase of 18%. For the six months ended on September 30, 2007, sales were $110.6 million compared to $94.5 million for the six months the prior year, an increase of 17%. The increase was due to increased retail reorders and new orders offset by decreased wholesale sales.

For the second fiscal quarter, net income was $4.5 million or $0.18 diluted per share compared to $3.3 million or $0.14 diluted per share for the same quarter of the prior year, an increase to net income of 37%. For the six months, net income was $10.7 million or $0.44 diluted per share compared to $8.1 million or $0.33 diluted per share a year ago, an increase to net income of 33%.

Retail reorder sales increased by 25% to $35 million for the quarter compared to retail reorder sales of $28.1 million for the same quarter of the prior year. For the six months, the reorder sales increased by 21% to $75 million compared to $62 million for the same period last year.

Retail new order sales increased by 6% to $16.5 million for the quarter compared to $15.5 million for the same period the prior year. For the six months, the new orders sales increased by 11% to $35.5 million compared to $32 million for the same period last year.

We acquired approximately 222,000 new customers in our second fiscal quarter compared to 212,000 for the same period the prior year. And we acquired approximately 458,000 new customers in the six months compared to 419,000 for the same period a year ago.

Our average retail order was approximately $79 for the quarter compared to $77 for the same quarter of the prior year. Now approximately 65% of our sales were generated on our website for the quarter compared to 62% for the same period the prior year. Our Internet sales increased by 23% to $33.7 million for the quarter compared to Internet sales of $27.4 million for the same quarter of the prior year. For the six months, the Internet sales increased by 24% to $71.6 million compared to $57.6 million for the same period last year.

The seasonality in our business is due to the proportion of flea, tick and heartworm medication in our product mix. Spring and summer are considered peak seasons with fall and winter being the off season.

For the second fiscal quarter, our gross profit as a percent of sales was 38.1% compared to 38.6% for the same period a year ago. For the six months, our gross profit as a percent of sales was 38.3% compared to 39.2% for the six months a year ago. The percentage decrease can be attributed to increased product costs and freight costs.

Our general and administrative expenses as a percent of sales were approximately 10.3% for the second fiscal quarter compared to 9.8% for the same quarter the prior year. And the G&A expenses as a percent of sales were 9.9% for the six months ended on September 30, 2007 compared to 9.3% for the same six months the prior year. The percent increase can mainly be attributed to stock-based compensation expenses.

Also for the six months, the adoption of FIN-48 during the June quarter resulted in approximately $386,000 of onetime uncollected sales tax expense in a state where for tax purposes it was determined that the Company had established [nexus].

For the quarter, we spent $8.1 million in advertising compared to $7.7 million for the same quarter the prior year, an increase of 5%. For the six months, we spent $16.6 million in advertising compared to $16 million a year ago, an increase of 4%. Advertising cost of acquiring a customer for the quarter was $36 for both the second fiscal quarter and the same quarter the prior year. And for the six months it was $36 compared to $38 for the same period a year ago.

Regarding the income tax provision, during the June 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 and September quarters. The Company also recognized an approximate $134,000 income tax benefit due to the disqualifying disposition of certain incentive stock option exercises during the quarter ended on September 30, 2007.

Going forward, we are anticipating an estimated tax rate reduction of approximately 1.5% compared to last fiscal year. Our working capital increased by $11.4 million to $62 million since March 31, 2007. The increase can mainly be attributed to cash flow generated from operations.

We had $52.2 million in cash and temporary investments and $15 million in inventory with no debt as of September 30, 2007. Net cash from operations for the six months was $12.8 million. In accordance with our share repurchase program, we repurchased approximately 70,000 shares paying approximately $992,000 during the quarter. And for the six months, we repurchased approximately 187,000 shares paying approximately $2.5 million. Capital expenditures for the six months were approximately $314,000.

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

(OPERATOR INSTRUCTIONS) Michael Cox, Piper Jaffray.

Good morning, congratulations on the quarter.

Thank you, Michael.

My first question is on the reorder sales and the strength you saw in that segment of your business, the strongest we've seen in a few quarters here. I was wondering if you could speak to the success there, if it was a function of reallocating some advertising dollars in the quarter?

We are doing a better job of communicating with our customer base. We are communicating more often, staying in front of them basically.

Okay, thanks. On the inventory in the quarter showed a fairly sizable jump versus last year's end of the Q2. I was wondering if you could comment on that if it was just a timing -- of the acceptance [of orders]?

We take advantage of all the promotions, so our inventory is going to fluctuate. I would say it was more that last year's same quarter it was lower than it should have been.

Okay, that is helpful. And then lastly on the gross margin, I was hoping you could comment on the impact that freight cost had on the gross margin that piece specifically?

What the freight piece is, you mean?

Yes. In terms of the year-over-year decline in gross margin.

I see. It is probably half of -- there's about 50 basis points reduction in gross profit. I would say about half of it is due to freight and half of it is due to product cost increases.

Okay, great. Thank you very much.

Anthony Lebiedzinski, Sidoti & Co.

Yes. Good morning. My question was whether or not the weather had any impact on your sales? One of the large specialty retailers lowered their guidance citing the warmer weather. I was wondering if you had any comment in regards to that?

No, I have no comment. I do not know the answer to that, so I'm not going to speculate.

Okay. I was wondering if there was a change of the mix of advertising between TV, online and print in the quarter versus last year?

There was no material change.

Okay and what are your thoughts on the current advertising environment?

We are in our off season now so it is not as critical as it was for the June and September quarters. It typically tightens up as we get into the holidays and so December quarter usually is not a good time for direct response advertisers. And luckily also there is less demand for our product, so we are in our off-peak season. So we are not anticipating any major impact.

Okay. And lastly, as far as the tax rate, what is the expected tax rate for the rest of the year? I missed your comments before.

We are anticipating about 1.5% less than the prior year's tax rate.

Got it. Okay, thank you.

(OPERATOR INSTRUCTIONS) Kristine Koerber, JMP Securities.

Hi, this is Jennifer filling in for Christine. Question for you. New customer growth was a little lighter than we were expecting. Was there any reason for this?

We buy random space on TV which means we are not guaranteed clearance and we were a bit generous to make sure that we cleared. So the cost of acquiring a customer if you look at it was the same at $36 and we spent about 5% more than the same quarter last year and grew 6%.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Michael Friedman, Noble Financial.

Good morning. Question about G&A. Do you expect that to stay steady as a percentage of sales or can you give us a little color on where you expect that line item to be for the remainder of the year?

The Board granted additional restricted stock to employees and the independent board members. We are seeing a percent increase can mainly be attributed to stock-based compensation expenses. So it depends on if there are any additional grants or not; we are not anticipating any for this fiscal year.

Okay so as a percentage of sales I guess everything would depend on what the stock options are going to do. But did you say you're not anticipating a material change of G&A basically?

That is correct. Obviously quarter to quarter it fluctuates. We are higher for the six month we are higher about 60 basis points. So I would assume going forward for the next six months that it will be slightly higher than last year.

Okay, I'm sorry is that on a whole dollar basis or on a percentage basis?

Percentage basis.

Percentage basis, okay. Can you tell us a little bit about the Betty White campaign? Is that going better than you had originally anticipated, as good as originally anticipated? Could you just give us a little flavor for that?

Well, the numbers don't lie. Obviously for the September quarter the results were the same as the same quarter last year.

Okay --

So you can draw your own conclusions.

Okay. Could you just give us a little flavor for the competitive environment, the veterinarian is getting more price competitive, are you seeing more Internet competition, anything along those lines?

I would say the competition is similar to last year, it's not much different.

Okay, thank you.

Michael Cox, Piper Jaffray.

Just one quick follow-up. On the last conference call you mentioned that you were revamping your website. I was wondering if that was in fact completed in the quarter and if there are any benefits that we should expect from that going forward?

We are still not live with the new platform. We decided to wait for the upgrade that is newly available before we go live. The reason obviously we are going to the new platform is for scalability, personalization and better customer service. So the time will show obviously if that reflects in the numbers once we go live.

And do you have anticipated date that you would go live at that site at this point?

Well, last time I said weeks and we're still not live so I'm hesitant to give you any dates at this time.

Okay, great. Thank you very much.

You're welcome.

That was last question, sir.

Thank you.

You are welcome.

We will be focusing our efforts in three areas to capitalize on the pet industry's growth trend. One, capturing additional marketshare. Two, increasing reorders with personalized communication and health education content. And three, improving our current service levels.

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

Thank you. Thank you participating in today's conference call. All parties may disconnect at this time. Thank you.