Petmed Express Inc (PETS) 2007 Q4 法說會逐字稿

Good morning. Welcome to the PetMed Express, Incorporated, doing business as 1-800-PetMeds conference call to review the financial results for the fourth fiscal quarter and fiscal year ended on March 31, 2008.

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 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. Good morning. I would like to welcome everyone 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 certainties. These statements are based on our beliefs as well as assumptions we have used based upon information currently available to us.

[Certain] of 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 fillings with the Securities and Exchange Commission.

Now let me introduce today's speaker, Mendo Akdag, Chief Executive Officer and President of 1-800-PetMeds. Mendo?

Thank you, Bruce. Welcome. Thank you for joining us.

Today we will review the highlights of our financial results. We will compare our fourth fiscal quarter and the fiscal year ended on March 31, 2008 to last year's quarter and fiscal year ended March 31, 2007.

For the fourth fiscal quarter ended on March 31, 2008, sales were $40.4 million compared to sales of $36.4 million for the same period the prior year, an increase of 11%. For the fiscal year ended on March 31, 2008, sales were $188.3 million compared to $162.2 million for the prior fiscal year, an increase of 16%. The increase was primarily due to increased retail reorders for the quarter and increase in retail reorders and new orders for the fiscal year.

For the fourth fiscal quarter, net income was $4.9 million, or $0.20 diluted per share compared to $3.6 million, or $0.15 diluted share for the same quarter of the prior year, an increase to net income of 35%. For the fiscal year net income was $20 million, or $0.82 diluted per share compared to $14.4 million, or $0.60 diluted per share a year ago, an increase to net income of 39%.

Retail reorder sales increased by 17% to $31 million for the quarter compared to reorder sales of $26.4 million for the same quarter the prior year. For the fiscal year, the reorder sales increased by 22% to $134.3 million compared to $110.5 million for the prior year.

Retail new order sales decreased by 5% to $9.4 million for the quarter compared to $9.9 million for the same period the prior year. For the fiscal year, the new order sales increased by 5% to $53.8 million compared to $51.1 million for the prior year.

We acquired approximately 126,000 new customers in our fourth fiscal quarter compared to 132,000 for the same period the prior year, and we acquired approximately 710,000 new customers in the fiscal year compared to 681,000 for the prior year.

Our average retail order was approximately $81 for the quarter and $80 for the fiscal year. Approximately 65% of our sales were generated on our Web site for the fiscal year compared to 62% for the prior fiscal year.

Our Internet sales increased by 13% to $26.5 million for the quarter compared to Internet sales of $23.5 million for the same quarter the prior year. For the fiscal year, Internet sales increased by 21% to $122.5 million compared to $100.9 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 fourth fiscal quarter, our gross profit as a percent of sales was 41.3% compared to 40.5% for the same period a year ago. For the fiscal year, our gross profit as a percent of sales was 39.4% compared to 39.8% for the prior year.

The percentage increase for the quarter can mainly be attributed to a shift in product mix to higher margin items. The percentage decrease for the fiscal year can mainly be attributed to increased product and freight costs offset by a shift in product mix to higher margin items.

Our general and administrative expenses as a percent of sales were 12% for the quarter compared to 12.4% for the same quarter the prior year, and for the fiscal year the G&A was 10.8% compared to 10.6% for the prior year. The improvement for the quarter shows leverage of the G&A.

For the fiscal year, the adoption 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 (inaudible).

For the quarter we spent about the same, $4.5 million for advertising, as we did the same quarter the prior year, and for the fiscal year, we spent approximately the same, $25.2 million in advertising, as we did the prior fiscal year. Advertising costs of acquiring a customer for the quarter was approximately $36 compared to $34 for the same quarter the prior year, and for the fiscal year it was $36 compared to $37 for the same period a year ago.

Our working capital decreased by $11.8 million to $38.8 million since March 31, 2007. The decrease can mainly be attributed to our reclassification of $24.7 million of auction rate municipal securities from temporary investments, long-term investments, due to a lack of market liquidity and the repurchase of approximately $11.6 million of our stock under our stock buyback plan, offset by cash flow generated from operations and the exercise of stock options.

We had $25 million in cash and temporary investments, $24.7 million in long-term option rate securities investment, and $17.9 million in inventory with no debt as of March 31, 2008. Net cash from operations for the fiscal year was $19.4 million compared to net cash from operations of $16.6 million for the prior fiscal year, an increase of $2.8 million.

In accordance with our share repurchase program, we repurchased approximately 583,000 shares paying approximately $6.7 million during the quarter. And for the fiscal year, we repurchased approximately 952,000 shares, paying approximately $11.6 million. Capital expenditures for the fiscal year were approximately $500,000.

Overall, we had a highly profitable year which can be attributed to increased reorders and our success in leveraging operating expenses.

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

(OPERATOR INSTRUCTIONS) Our first question does come from Julie Johnson of Piper Jaffray You may ask your question.

Thank you. Congratulations on the quarter.

Thank you.

My first question is related to ad spend. Can you comment or provide and update on your outlook fir the advertising environment as we move into the political campaigning season?

We are expecting the heaviest impact we think will be in September and October for the political season. I would say there probably was some impact in the March quarter, there was a larger base of advertisers also impacted by primaries compared to last year, so we spent less on TV in the March quarter than what we planned on spending.

And would you plan on spending less on television advertising through the fall quarter as well?

April was pretty well, pretty good, so we cleared pretty well in April, but it's difficult to tell, so we were able to spend more money in April so I don't know if that's any indication. Obviously that could change.

Okay. Thank you.

The next question would be on your large cash position. Could you provide an update on your thoughts in terms of share repurchasing?

We spent, I believe, about $11.6 million so far, so we have about $8.4 million left on our stock buyback plan, so we plan on using that at this time. At this time we don't have any other plans.

Okay. Thank you.

My last question is kind of a more macro trend. Can you discuss what you're seeing in your business as it relates to a challenging economic backdrop?

The March quarter was a little soft. The weather might have played a role. Other than that, we are probably, I'm not going to say we are immune from recession, but probably we're in a recession resistant industry.

Okay. That's helpful. Thank you. I'll jump back in queue.

Anthony Lebiedzinski of Sidoti & Company, you may ask your question.

Good morning.

My question is actually a follow-up on the last comment that you mentioned that the weather had somewhat of an impact. Can you perhaps give us some more color on that? And, also, did you see any changes in terms of sales by region versus last year?

We looked at, I believe, January and March were colder this year compared to last year, February was probably somewhat about the same. So overall industry was soft. We were not the only ones, so at this point our guess is that the weather might have played a role in it.

And in terms of sales by region, anything you can comment there?

Always in off-peak season, the southern states, we have a lot higher sales than northern states, so it was about -- that was still the case this year.

Okay.

And, also, you mentioned that the gross margin benefit is from a mix shift. Can you give us some examples of some of these higher margin items that drove the increase in the gross margin?

Due to competitive reasons, I'd prefer not to get into details of that.

Okay. That's fair.

And my last question is you mention in the release here that you're adding another 15,000 in square footage. What's the incremental Cap Ex and rent expense that we should expect for this?

I'm going to have Bruce answer that.

As far as incremental, basically we have an update where, actually, I can tell you right now. Initially before our extension we were forecasting about $520,000 of rent expense for 2009, that goes up to 641 and then it will increase approximately, you know, 4 or 5% after that.

And is there any Cap Ex that you're going to be putting into this?

We are, but we are in the middle of planning it so we don't have solid numbers really to report at this time.

Okay. Thank you.

Dom McCava of Canaccord Adams, you may ask your question.

Good morning.

Good morning.

So I'm looking at the new customers in the March quarter and it looks like they're down year-over-year 5% approximately. I know reorder sales were up, but -- and it also looks like customer acquisition costs were up.

Can you just give us some color as to what's going on there? Was that expected or are you targeting a different kind of customer? How can we look at that?

There were -- we did not spend on TV as much as we planned spending in the March quarter. The inventory was tight in the March quarter. The larger base of advertisers also impacted that.

We paid really a higher cost. We had a higher cost of advertising in the March quarter so that impacted that. So we were not able to spend more in the March quarter is the one reason and the second reason was the higher cost of advertising.

Okay.

Is there a concern that today's new customers are tomorrow's reorder customers? Are you still planning maybe to pay up a little bit for some advertising even if the inventory is tight, has your view changed on that?

Yes, we are willing to pay a little bit more to get new customers.

Okay.

And then as far as the state sales taxes, you mentioned, I'm not sure if you mentioned the state that was associated with that, but are you seeing pressure in any other states here or how can we view your exposure to potential sales tax issues going forward?

That was really an access issue. We had presence in that state, that's why.

Okay. Which state was that?

That's why it took place.

Did you mention the state? Hello?

Yes. Georgia.

Okay. Sorry about that. Okay.

And then on the new Web site, it looks like the Web site was redone. Can you talk about the improvements there, you know, how have the new hooks been faring in terms of organic search or natural search? And then can you talk about some the, do you have any metrics tied to improvements in the business related to the new Web site?

We have a new platform so we launched that probably was late February and it's still a work in progress. So as far as matrix' I'd rather not giving any at this time.

Okay.

And then a housekeeping question. Wholesale, I know wholesale's tiny, but can you break out wholesale versus new order sales both for the quarter and for the year?

Quarter, it was really minimal. Wholesale, let me see here, $44,000 for the quarter, wholesale.

Yes.

And for the year, it was $220,000 roughly.

Okay.

And then just going back to the Web site a little bit, I know you had talked about adding some personalization features. Is there any early insight into how that's impacting reorders or conversion?

We already had some personalization, so this is nothing new. This is just improving upon what we got.

Okay.

And then I guess the last question then is, you know, if keywords, are you seeing any keyword inflation for your vertical and if you are seeing it in keywords and TV advertising are both looking high, what are your most effective marketing means right now to reach new customers?

Well, it's really multi-channel marketing, so it's difficult to point out whether it's TV drives, for example, keyword searches. So I'm not going to break it up, but there are certain advertisings that are most efficient and what we do is we maximize that, then you look at the other channels and online is probably -- there are certain portions on online that's most efficient, but there are also some TV stations that are very efficient.

Okay.

It's really a multi-channel approach.

Right. So were you seeing keyword pricing go up?

Yes. The -- there's -- the cost is higher. That doesn't mean, obviously, we control how much we are willing to pay and we are going to pay what we can afford, so --

Okay. Okay.

I guess my last question is on gross margins, looked like they improved. Can you talk about transportation and product costs? I know you had some up front purchases last quarter that may have helped. Can you talk a little bit about that? Thanks.

Yes, the quarter, it's off-peak season, typically there's less competition and there was a shift to a higher margin of products during the quarter, but if you look at the year, there was a -- we went down, actually, gross profit decreased by 40 basis points. And that's made up of increase in product costs and freight costs offset by shift to higher margin products.

Thank you.

You're welcome.

Michael Friedman of Noble Financial, you may ask your question.

Hi, guys.

A follow-up on the gross profit margin. So this higher margin shift happens. Is this something that you think the Company had a hand in or is this sustainable? Can you give us a little color on that?

Off-peak season, we will have -- it's going to fluctuate, so we attempt to maximize the gross profit dollars. We really do not pay a lot of attention to gross profit percent.

But peak season, the market is more competitive, so the maximized gross profit dollars we're going to be more aggressive price-wise. So that was pretty high.

It was impressive, the March quarter, but I don't expect to attain that during the peak season. I anticipate that gross profit percent to go down.

Okay.

But did that just naturally happen or did the new advertising campaigns or Web sites or anything -- did anything have an impact to shift that or just happened through the consumer?

Well, if you recall, we had high inventory levels in December, at the end of December, and obviously we bought before the prices went up compared to last year. So that had a positive impact on it. The second impact is really a shift to higher margin items.

Okay.

The off-peak season, there's less competition.

Okay.

And then talking about competition, do you sense that the vets are becoming more aggressive or is there anybody else out there that you feel has really stepped up their campaign against you guys?

Probably so far this year it's about the same as last year, I would say. I mean it's, the market is competitive and there are more players entering, we notice every day so it's a competitive market.

Okay.

And you'd mentioned, we talked a little bit about freight costs. The consumer, are they becoming more price competitive as well and the two of those together, will that pressure your margins?

I mean there are different consumers, there are different segments. Some of the consumers are price sensitive, some are not, some are more focused on the service. So the really -- the ideal, the personalization and segmenting it properly and addressing the segment properly.

If they're price sensitive, obviously, we need to address that and if their focus is service, we need to address that. So at the end of the day we need to differentiate ourselves with better service.

Okay.

But in general, conceptualizing the business, is it correct to think that the consumer generally would be more price sensitive, the competitors are probably focused a little bit on that and you would assume freight costs would probably increase a little bit in the fiscal year, is that fair?

Again, it depends on what segments of the customers you're talking about. Some customers are not price sensitive they focus on the service.

Okay.

So if we service them well, they're not going to sell you for a couple of dollars.

Got you.

And you've had some early indications as to the advertising environment in general. You've been through the cycle before. Any surprises so far?

In April, the inventory, TV inventory was not tight so we were able to clear, so that was a pleasant surprise. That doesn't mean that's not going to change, though, so --

Okay.

But early indications seem to be slightly more favorable if, you know, I'm reading between the lines? Obviously we can't (inaudible).

We are able to clear. We are paying a little bit more, but we were able to clear what we wanted to clear in April, so compared to last year.

Okay.

And then looking at your advertising spend, obviously, we're talking about a potentially tight period of time for the advertising space. If you're able to clear everything you'd like, I mean do you have a sense for whether you can hold it year-over-year at the same pace like you did recently or do you expect to spend a little bit more?

Dollar-wise, we like to spend a little bit more and that's what, you know, we attempt to do. So we'll see if we are able to.

Okay. And then one last question.

As far as you talked about Internet sales, those are creeping up a little bit, can you just discuss the financial impact a little bit when a customer orders over the telephone versus ordering through the Internet? Is there a big gain there for the Company one way or the other?

Obviously it's more efficient. Having said that, don't think that Internet customer is service free. They e-mail us, we have live chats, they call us anywhere although they order from the Internet. So it is really not service free.

We don't look at it as, you know, shifting the customer. We are giving every channel to the customer. So if they want to buy from the Internet, you know, we've got it. If they want to call us and order, we'll be happy to take their order.

If they want to fax us, if they want to mail us, if they want to e-mail their order, we're going take it. So the consumer really calls the shots on that. There is some efficiency, obviously, if they order on the Internet, but it's not totally service free as we theoretically think.

Okay. And then, actually, I'm sorry, one last question.

Can you comment on your new advertising campaign? We haven't really touched on that at all, on TV. How has that been received? Can you give us any feedback on that?

It's doing okay so we don't have complaints. Obviously we're running it. We have other creatives, also, and we're running it means that we're satisfied with the results.

Great. Thank you.

You're welcome.

Edward Woo of Wedbush, you may ask your question.

Going back to the increasing freight costs for the year, do you think that's going to be impacting you this year as well? You hear a lot about oil prices and whatnot.

Yes, it will be impacting us this year, too, and we are going to have to make a decision as to maybe pass it to the consumer, some of the increases.

Great.

And then the other question I have is in terms of price increases also by your suppliers, you mentioned that there's a little bit of increases done and you guys are building up some inventory. Is it price increases typically once a year?

Yes.

And are typically right at the beginning of the year?

Yes. Most of them are, yes.

Great. Thanks a lot.

You're welcome.

Kristine Koerber of JMP Securities, you may ask your question.

Hi.

With regards to the warehouse extension, has that 15,000 square feet, has that been added already and with the extension, how much will you be able to support in sales going forward?

It has not been added yet. We anticipate that it will be added by probably January 2009, February 2009 before our next peak season. We are doing some more automation on our fulfillment and we anticipate that it will double our capacity from current capacity, I should say.

Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS) The next question does come from Paul Taylor of Taylor Investment Services. You may ask your question.

Hi, folks. Another good quarter.

I just wanted to ask about the long-term investment line, the auction notes. Any possibility there would be an impairment there? I assume they're all paying and everything and I know everybody else has them, but --

They're municipals. They're valued at 100% currently. Do you have anything to add, Bruce?

Just to give you an idea, as of March 31, 2008, the Company had $29.5 million invested in auction rate securities with $4.8 million classified as short-term investments and $24.7 million classified as long-term investments.

As of May 9, actually as of today, we're currently, we have 24.7 in auction rate securities. So we actually did, were able to sell about $4.8 million since March 31.

I mean since January 1, we've been able to cash out about almost half of our position in auction rate securities. Our auction rate security investments are not mortgage backed based, but are municipal based and banks are still valuing those bonds at 100% of par.

Currently we don't see any valuation issues. And then for us, again, an auction failure is no different than holding these investments. Luckily, we're in a position where we don't need the liquidity and the extra interest income is a big benefit to us.

I've got some, too, for what it's worth.

Number two, your Cap Ex budget, I know you're doing the extension, but should we expect anything different than the normal $1 million or so for this year?

We do not have completed our plans yet for the automation. We are going to do further automation on our fulfillment center and the numbers are not nailed down yet. So it will probably be in the $1 million range is what I would anticipate, but we'll probably put something in the 10-K, but it has not -- numbers have not been finalized.

That's $1 million additional or $1 million total?

I would anticipate about $1 million additional for the warehouse automation, so $1 million, $1.5 million is roughly what you would be looking at for the fiscal 2009.

All right. Thank you.

You're welcome.

Dom McCava of Canaccord Adams, you may ask your question.

Sure. Just to follow-up on your transportation costs, are you seeing, is the cost increase you're seeing from the supplier to your warehouse from the warehouse to the customer or both and which one is having the bigger impact based on, I guess, based on your contracts with the transportation companies?

Our shipments, outbound from our warehouse to the customer will have the biggest impact.

Okay. Okay. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS) At this time, we have no further questions.

Thank you.

According to the American Pet Products Manufacturer's Association, spending on pets in the U.S. increased by about 7%, enriched $41.2 billion in 2007. The pet supplies and medicine category grew approximately 5% and reached $9.8 billion.

There's a continuing increase in pet-related spending, a higher awareness of pet health and the continued humanization of pets, integrating them into all aspects of our lives. To capitalize on this trend, we'll be focusing our efforts on three areas, one, capturing additional market share, two, increasing reorders with personalized communication and health education contact, 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. Today's conference has ended. You may disconnect at this time.