Petmed Express Inc (PETS) 2007 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, 2007. 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, direct mail, and print advertising campaigns which direct consumers to order by the 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 would like to turn the call over to the Company's Chief Financial Officer, Mr. Bruce Rosenbloom.

Thank you. I would like to welcome everybody here today. Before I turn the call over to Mendo, 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 be involved in 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, Mendo Akdag, 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 third fiscal quarter and nine months ended on December 31, 2007 to last year's quarter and nine months ended on December 31, 2006.

For the third fiscal quarter ended on December 31, 2007, sales were $37.3 million compared to sales of $31.4 million for the same period the prior year, an increase of 19%. For the nine months ended on December 31, 2007, sales were $147.9 million compared to sales of $125.8 million for the nine months the prior year, an increase of 18%. The increase was primarily due to increased retail reorders for the quarter and increased retail reorders and new orders for the nine months.

For the third fiscal quarter, net income was $4.4 million or $0.18 diluted per share compared to $2.8 million or $0.11 diluted per share for the same quarter the prior year, an increase to net income of 60%. For the nine months, net income was $15.1 million or $0.62 diluted per share compared to $10.8 million or $0.44 diluted per share a year ago, an increase to net income of 40%.

Retail reorder sales increased by 28% to $28.4 million for the quarter compared to reorder sales of $22.1 million for the same quarter the prior year. For the nine months, the reorder sales increased by 23% to $103.4 million compared to $84.1 million for the same period a year ago. Retail new order sales decreased by 3% to $9 million for the quarter compared to $9.2 million for the same period the prior year. The decrease in new order sales can directly be attributed to a 13% reduction in advertising spending compared to the same quarter last year. For the nine months, the new order sales increased by 8% to $44.4 million compared to $41.2 million for the same period last year.

We acquired approximately 127,000 new customers in our third fiscal quarter compared to 130,000 for the same period the prior year. And we acquired approximately 585,000 new customers in nine months compared to 549,000 for the same period a year ago. Our average retail order was approximately $76 for the quarter compared to $75 for the same quarter the prior year. Now approximately 65% of our sales were generated on our website for the quarter compared to 63% for the same period the prior year.

Our Internet sales increased by 23% to $24.4 million for the quarter compared to Internet sales of $19.8 million for the same quarter the prior year. For the nine months, Internet sales increased by 24% to $96 million compared to $77.4 million for the same period 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 40.6% compared to 40.8% for the same period a year ago. For the nine months, our gross profit as a percent of sales was 38.9% compared to 39.6% for the nine 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 decreased to 12.2% for the quarter compared to 12.8% for the same quarter the prior year. And for the nine months, the G&A expenses as a percent of sales were at 10.5% compared to 10.2% a year ago. The improvement for the quarter shows the leverage of the G&A.

For the nine months, the adaption of FIN 48 during the June quarter 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 nexus. For the quarter, we spent $4.2 million in advertising compared to $4.8 million for the same quarter the prior year, a decrease of 13%. For the nine months, we spent $20.7 million for advertising compared to $20.8 million a year ago. The decrease in advertising for the quarter can be attributed to decreased television advertising due to tight inventory as compared to last year's same quarter.

Advertising costs [for acquiring] a customer for the quarter was approximately $33 compared to $37 for the same quarter the prior year and for the nine months, it was $35 compared to $38 for the same period a year ago.

Our working capital increased by $14 million to $64.6 million since March 31, 2007. The increase can mainly be attributed to cash flow generated from operations. We had $47 million in cash and temporary investments and $20.1 million in inventory with no debt as of December 31, 2007. The increase in inventory can be attributed to our taking advantage of buying opportunities.

Net cash from operations for the nine months was $9.9 million compared to net cash from operations of $15.1 million for the same period last year, a decrease of $5.2 million. The decrease can mainly be attributed to higher inventory and lower accounts payable.

In accordance with our share repurchase program, we repurchased approximately 182,000 shares paying approximately $2.4 million during the quarter and for the nine months, we repurchased approximately 369,000 shares paying approximately $4.9 million. Capital expenditures for the nine months were approximately $352,000. Overall we had a highly profitable quarter which can be attributed to strong reorders and our success in leveraging operating expenses.

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

Thank you sir. (OPERATOR INSTRUCTIONS). Michael Cox, Piper Jaffray.

Congratulations on the quarter.

Thank you, Michael.

My first question is related to the ad spend in the quarter. You mentioned tight inventory. I was wondering if you could just comment on your outlook for the advertising environment as we move into the political season and if we should continue to expect 10% to 15% to clients in ad spend in the coming quarters?

Our budget is we budgeted higher dollars than what we spent last year. Whether we can spend it or not, the time will show. What we are anticipating as the primaries, the most state primaries will be consolidated into February and March, so we are anticipating some impact on cable news stations. We are anticipating the heaviest impact in September and October. Again, mainly on the cable news stations and there may be some spillover but it is difficult to say how it is going to shape up. We are likely going to spend some dollars to online advertising and possibly some more print.

Okay, that's helpful. Thank you. And as it relates to the share buyback, I am curious as to what it would take to get you more aggressive in buying back stock given your large cash position?

Well, it is subject to market conditions and other factors in accordance with SEC requirements. If you noticed in the December quarter, I think our average purchase was almost $13. So obviously if we are willing to buy at $13, we will be willing to buy at the current price levels.

Okay, that's helpful. And then my last question relates to the gross margin. You are starting to see a moderation in the gross margin trend. I'm curious as you look out over the next two to three quarters if you expect that that trend will continue? Or perhaps the early buy opportunity here from -- in inventory, if that perhaps helps on the gross margin as well? And thanks again.

It will help, the early buying opportunities will help our gross margins but it depends on how competitive the market is. The market dictates our pricing so we won't obviously -- we want to be competitive -- but we don't want to leave any money on the table. So we price according to the market so if the market is competitive, we will be as aggressive pricewise and that will put pressures on the gross margin.

Thank you very much.

(OPERATOR INSTRUCTIONS). Edward Woo, Wedbush Morgan.

How does the competitive outlook -- -- (technical difficulty)

I'm sorry, I could not hear you.

Sure, is this better?

Yes.

I had a question. One is, how does the competitive outlook appear right now with some of your other peers? And also, as the economy seems to be having a slowdown, how do you think that is going to impact your business?

Right. Off-peak season we are in now, usually there is less competition in off-peak season. On peak season which is spring and summer, there is a lot more competition. So we are right now we are in -- there is less competition currently. But we are anticipating that the competition will increase in the spring. As far as the -- it usually the recession if there is a recession should help us clear more on television and probably at more attractive prices because there will be less general advertisers advertising on television. So it may actually help us.

Do you think that as a consumer (technical difficulty) online (technical difficulty)

I'm sorry. I lost you again.

I'm sorry. I apologize for that. My phone system didn't seem to be very good this morning. But if you see more people driven online to try to save money purchasing pet medication, did you see any of that when we had I guess our last slowdown back in 2001-2002 time period?

In the December quarter, 65% of our sales were generated on our website and compared to 63% for the same quarter last year. So there was a 2% increase in Internet sales so we anticipate that trend to continue in the short term.

Great. Thank you.

Dom LaCava, Canaccord Adams.

Hello?

Your line is open, sir.

Can you here me?

Yes.

Okay. Sorry about that. Just wanted to dig down deeper a little bit on the product cost and the freight cost just to kind of expand on an earlier question. Can we expect actually first, can you kind of provide some color on the impact of product costs versus freight costs and what is driving each one? And then, can we expect freight costs to continue to go up and offset some of the product cost advantages you may be seeing due to the increased inventory? Can you just kind of first, separate the two and then talk a little bit about what we can expect?

I will roughly separate it. Two-thirds of the increase in the cost was due to freight expense increase and probably one-third due to product price increases. But we just had product increases in January so that is why we bought heavily in December. And the freight, we ship U.S. Postal Service Priority Mail, the majority of our shippings and their last price increase I believe was in May 2007. So it is already in our cost. The FedEx and UPS just increased their prices recently but that is a smaller portion of our shipping, so it should not have a huge impact.

Okay, okay. So it sounds like -- I mean the increased inventory was due to the better pricing than had you waited. But if it's two-thirds/one-third, we can still expect maybe a little bit of gross margin pressure going forward is kind of what I'm hearing?

I would expect yes. It depends on how competitive the market is which we are anticipating that it will be more competitive in spring down what it is right now. I would expect some gross margin pressures, yes.

Okay. And then moving over to the advertising, I understand that the TV environment -- can you talk a little bit and I did see some more -- I have seen some PetMed advertising online at different sites. So I just wanted to see if you could talk a little bit more about the online advertising campaigns versus television? I know that you had mentioned that the inventory was tight so you kind of reeled back the advertising spend on TV. But does this mean that more money has been allocated to the online channel or how can we think about that?

Yes, we will likely spend more money on online assuming it pays off obviously. So we are not going to waste any dollars if it is efficient and paying off, yes we will put more money on online. We basically test and find out what is working and what is not working and there is a lot of tactical decisions obviously that goes onto it. If it is working, we put more money in it. If it is not working, we have to adjust it or it may be the creative -- try different creatives, etc. And so it is an ongoing maneuvering that goes on but I would anticipate we will spend more money online in 2008 compared to 2007.

Okay. So what has changed since the last quarter as far as I know it is an ongoing analysis as far as what's working online. But can you talk a little bit about what has changed with the online advertising environment and specifically what you're seeing as far as effective campaigns?

We are operating pretty much similar to how we did in the December quarter currently online. But we are going to be testing some other avenues and opportunities online. It depends on if they are successful or not so obviously whether we will continue or not.

Okay. And what is the approximate mix of online versus television or non -- I guess online versus off-line?

We discontinued giving that information due to competitive reasons. It is really multichannel. When you run on television, that impacts your online and that impacts your print too. So you cannot really separate these things. It is a multichannel advertising effort.

Right. And how long, how much longer does the Betty White campaign have? Is that something that runs through '08?

No, actually it will be ending end of February and we will start a new campaign in March.

Okay. Is it safe to say that it will be continuing the same campaign or someone -- or a new spokesperson or a completely different -- sort of campaign?

A different creative, you will see it in March.

Okay. And then the last question, any update on website relaunch?

We are still up live but we have done some tests and we have gone live with our new platform several times and it will be -- we will be live in the spring. It should be shortly but I am hesitant to give any date at this point.

Okay. And I guess a final question just on that, is any insight into what sort of features we can expect as part of that relaunch?

You will see a redesign not immediately after we go live but after about 30 days probably a month later. And there will be more personalization is our focus, more personalized marketing to the consumer.

Great. Thank you very much.

Bill Lennan, Broadpoint.

Hi. I got lost in my call so I missed a couple of things. Could you repeat the new customer numbers, question one? And number two, if you already covered this I apologize, but what is the environment for passing along shipping charges so far this year between you and the competition? Do you think people are generally passing along that or is somebody going to be aggressive and eat that on behalf of customers?

We acquired approximately 127,000 new customers in the December quarter compared to 130,000 for the same quarter the prior year. As far as freight, we will continue our free shipping on orders over $39. We may look at increasing that $39 as a possibility but at this time, we are planning on continuing with free shipping. I don't know what the competition is going to do.

Okay, thanks.

(OPERATOR INSTRUCTIONS). Paul Taylor, TIS.

Hi folks. Congrats on another great quarter. Just a personal comment. I heard the earlier fellow who said what is it going to take for you to spend your cash. There are some people out here who are perfectly fine with you being very deliberate with that cash. I don't know how many buybacks I have seen where people spend all their money and then have one poor quarter or the stock goes down half and then they don't buy anything else. So again, just a personal comment that I am fine with the cash as long as you folks know what you are doing with it and I don't think anybody would question that you do.

Having said that, is there any way that you could give us a little bit on what you're looking to do with the cash as far as acquisitions or buybacks? What is the priority that you have? I know that you bought shares this quarter but what is your overall plan for that cash?

We have on approval from the Board to buy back $20 million. We only used almost $5 million so there is $15 million still that we can use to buy back which we plan on doing. Other than that, we don't have any other plans as far as acquisitions are concerned. We do look at companies. There is nothing pending at this time.

One other question and I know this is sort of a fuzz ball but your top line continues to grow close to a 20% rate and I guess you start to wonder how long that can continue? Do you have any thoughts on that?

We don't give guidance so it depends how successful we are with reorders and if the reorders are strong, you know you have got a chance to continue. And we still need to continue to add new customers in an efficient manner. Obviously we don't want to waste any advertising dollars but the key to success in the model is reorders and we are doing a better job of marketing to our customer base. Our marketing is more personalized and relevant to their needs and if we can continue with that success, we will be okay.

Thank you.

Anthony Lebiedzinski, Sidoti & Co.

Yes, good morning. Just following up on the questions about the cash usage, has the Board discussed the idea of perhaps initiating a cash dividend?

We did in the past. We decided not to at this point. We may discuss it again but obviously at this point, there is no dividend.

Okay. And I was wondering if you guys could comment for the quarter sales by region, any thoughts about like how the sales were in markets where -- have been most impacted by the housing market? Any thoughts about that?

Not really, no. There is really no change in our mix of regions compared to last year.

Okay. So across the country you saw pretty much the same type of sales growth?

Southern states obviously we have heavier sales due to seasonality, the flea, tick and heartworm, the product mix that we sell.

Okay, thank you.

Dom LaCava, Canaccord Adams.

Hi, just a housekeeping question. I may have missed it but the breakout between -- I know you mentioned the wholesale or the new order sales and reorder sales -- was zero the figure for wholesale?

It is minimal. We probably did less than the $50,000 for the quarter. That is why I did not mention it for the December quarter just finished up. Let's see if I have that -- hold on one second.

And if you could just repeat the new order and reorder. I just want to make sure I've got the right figures.

For the quarter, wholesale was $43,000 compared to $72,000 for the same quarter last year. For the nine months, wholesale was $176,000 compared to $535,000 for the nine months of the prior year. Reorder sales for the quarter was $28.4 million and new order sales for the quarter was $9 million.

Okay. That's it. Thank you.

You are welcome.

That was our final question. I will now turn it back over to the speakers for closing comments.

Thank you. We will be focusing our 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 level.

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

Thank you for participating and you may now disconnect.