Petmed Express Inc (PETS) 2008 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 for the first fiscal quarter ended on June 30, 2008. As 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 provides an attractive alternative for obtaining pet medication in terms of convenience, price, ease of ordering, and rapid home delivery.

At this time I would like to attend 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 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 on 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, 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, 2008, to last year's quarter ended on June 30, 2007.

For the first fiscal quarter ended on June 30, 2008, our sales were $68.4 million compared to sales of $59 million for the same period the prior year, an increase of 16%. The increase was due to increased retail reorders and new orders. For the first fiscal quarter, net income was $6.6 million, or $0.28 diluted per share, compared to $6.2 million, or $0.25 diluted per share, for the same quarter last year, an increase to earnings per share of 10%.

Retail new order sales increased by 17% to $22.1 million for the quarter compared to $19 million for the same quarter the prior year. Retail reorder sales increased by 16% to $46.2 million for the quarter compared to reorder sales of $40 million for the same quarter the prior year.

We acquired approximately 267,000 new customers in our first fiscal quarter compared to 236,000 for the same period the prior year. Our average retail order was approximately $87 for the quarter and approximately 64% of our sales were generated on our website for the quarter.

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, as a percentage percent of sales, was 37.7% compared to 38.4% for the same period a year ago. The percentage decrease can be attributed to increased product cost, 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 8.5% for the first fiscal quarter compared to 9.5% for the same quarter of the prior year. The improvement shows the leverage of the G&A. We spent $10.1 million in advertising for the quarter compared to $8.5 million for the same quarter the prior year, an increase of 19%. We took advantage of advertising inventory availability during the quarter and advertised more in order to increase our market share. The advertising cost of acquiring a customer for the quarter was approximately $38 compared to $36 for the same quarter the prior year.

Our working capital increased by $16 million to $54.8 million since March 31, 2008. The increase can mainly be attributed to a reduction of long-term auction-rate securities investments and cash flow generated from operations. We had $40.6 million in cash and temporary investments, $14.9 million in long-term auction-rate securities investments, and $24.8 million in inventory with no debt as of June 30, 2008.

Net cash from operations for the quarter was $6.6 million. In accordance with our share repurchase program, we repurchased approximately 93,000 shares paying approximately $1.1 million during the quarter. Capital expenditures for the quarter were approximately $213,000.

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

(OPERATOR INSTRUCTIONS) Michael Friedman, Noble Financial.

Hi guys, can you hear me?

Yes, Michael.

Can you give us an idea of how freight costs are impacting your business? Are they impacting it at all? You didn't really talk about that.

Actually, obviously, the freight cost went up. Having said that, our free shipping offer, we changed it from priority to standard. With that our freight costs actually came down compared to last year's same-quarter by about 40 basis points.

The price impact that you had were you looking to -- you talked about taking market share, can you give us a sense how the competition played into that line of thinking as well?

Competition was really similar to last year we were just more aggressive to capture market share.

Okay. Looking at the gross profit margin on a year-over-year basis for the entire year, do you think it makes sense to see similar narrowing of the margin on that line going forward?

Compared to last year, I anticipate, yes, it will be lower than last year. Having said that, going forward rest of the fiscal year I anticipate it to be higher than the current quarter -- slightly higher than the current quarter we just finished.

Okay, so the gross profit margin itself you think will be a little bit higher?

Than the June quarter, but lower than last year's same-quarters.

Okay, great. What about G&A on a year-over-year growth basis? Do you think that goes up with inflation or do you think you have to add some more folks?

It's semi-variable, the G&A, so there is still some room for leverage. But I wouldn't expect a lot.

Okay. Can you give us a sense for the advertising market in the segment in which you are advertising, you talked about taking advantage. Do you still see that currently? Have things changed? Can you give us a little sense for that?

First two weeks of July it has not changed. Having said that, obviously, it could change. We are anticipating the biggest impact of the presidential elections probably in September and October.

Can you give us an idea of what your internal goals is as far as new customers you are going to add this fiscal year?

We don't give guidance, as you know, so I'm not going to get into that.

Okay. Then one last question regarding the cash. Are there any new possibilities on the horizon for the use of that cash since the last conference call or is it pretty much the same?

It's pretty much the same. We still have about $7.3 million left in our share buyback plan we intend to use. Other than that, there are no other plans at this time.

Okay. Thank you very much.

Mark Arnold, Piper Jaffray.

Very nice quarter, guys.

Thank you.

I guess just a couple of follow-up questions. I think most of them were answered in the last one, but just back to the new customer growth in the quarter, you know it's very strong. Can you talk at all about anything you changed in the quarter in terms of targeting your advertising spend toward new customers and anything there that helped you kind of achieve that really strong new customer growth in the quarter?

We spent more money. So we spent 19% more this June quarter compared to last year. So that is the key reason for the new orders being -- obviously, there was remnant space availability on TV that is probably due to the softer economy. That helped us.

Do you feel that that level of spending may be elevated for the rest of the year, or is it just going to depend on that remnant space being available?

It's going to depend on the remnant space being available.

Okay. Then I guess just back on the shipping costs, you mentioned one change. You said from priority to standard. What does that do to service for your customer?

Slightly slower service, but we tested very carefully that made sure that customers were still happy with the service.

I apologize for not knowing the mail system perfectly, but I mean are we talking -- it's what one to two additional days, typically?

That is correct, yes.

Then finally just on the G&A line, obviously, real strong performance there in the quarter not just on a percentage basis, but on the absolute dollar basis it's only up a couple hundred thousand dollars from last year. Where there any other factors there that kept that number real low or is it just a benefit of scale?

Last year there was one-time charge due to Nexus being established in another state, which had about a 65 basis point impact. So if we take that out of the equation, the net gain is really 35 basis points compared to last year.

Great. Thank you, guys.

Anthony Lebiedzinski, Sidoti & Co.

Good morning. A couple of questions. First, I was wondering if you could just comment on what have you been doing differently this year versus 2004 when you had the last presidential election in terms of the advertising?

There was more remnant space availability during the June quarter compared to 2004 and a softer economy might have played a role. Also the presidential elections, I believe they spent less money in the June quarter compared to 2004.

In terms of your media mix, have you changed how much you advertise on TV versus the Internet and some other media?

No, there has been no material change.

Got you. Then as far as your view as far as what the new customer acquisition costs are going to be going forward next couple of quarters, is there any view that you can share with us?

It's difficult to tell. It's going to depend on really remnant space availability, inventory of availability on TV. So if it continues the way the June quarter was, it's going to be favorable but it's difficult to tell. As I pointed out, we are expecting the biggest impact of the presidential elections in September and October.

Okay, but those months are already sort of closer to your off-peak season months so that shouldn't really have that much material impact on you guys, right?

That is a fair assumption.

Okay, well thanks a lot.

Mr. LaCava, Canaccord Adams.

Thank you. Good quarter, guys.

Thank you.

Can you just -- you may have already said it, I may have missed it. When did you institute the new shipping change from priority to standard? Was that early in the quarter or late in the quarter?

We started about six months ago, but we implemented it slowly. We did some testing to make sure that customers were not complaining and they were happy. So the full impact really took place more in the May, month of May.

Okay. There is no real discernible pushback from customers as far as getting products later now?

No, there is not at this time.

Okay. So the feedback has been, I assume, has been good enough to continue.

That is correct, yes. I think consumers understand with the oil prices keep going up that -- they are not complaining, let's put it that way.

Okay, okay. I know you had mentioned on the last call the potential to pass on higher costs to customers. I think you indicated you did not do that in this quarter. Do you still feel like that is something that could happen going into the second half of 2008?

Yes. Later in the year we will probably pass on the product cost increase to the consumer.

Okay. Now the $87 average retail order -- the increase in that figure, how much of that was higher costs versus cross-selling efforts?

Roughly, I would say, half of it is due to price increases and the other half due to up-selling and cross-selling.

Okay. Then you already touched on the gross margin, so gross margins it sounded like we can expect there to be a little more pressure here heading into the back half?

I would anticipate it to be higher than the June quarter, but lower than last year's same comparable quarters.

Okay. Do you have any color as to how the new TV ad campaign is doing compared to the old one?

Well, it's doing fairly well. So numbers speak for themselves.

Okay. Then another question on the competitive landscape. Are you seeing pricing pressures from either the vets or other online competitors or anyone else? Can you talk about competition a little bit?

The market is competitive, especially within certain segments, but I would say it's similar to last year.

Similar, okay. Then I guess my last question is -- I know you had a new personalization campaign or functionality that was put into the website in your marketing campaign. Can you talk about how personalization is impacting reorders and conversion?

We are still working on it, so it's a work in progress. It's an ongoing -- the personalization is ongoing, so we are not done with it yet. So the average order size was up to $87, I believe it was $84 the same quarter last year, so that is a pretty good increase. About $1.50 was due to price increases and the other $1.50 due to up-selling and cross-selling. Personalization, obviously, helps with that.

I guess one more then. You did mention that you are -- you do plan to spend up for TV ad pricing, if it's going to go up, which you expect it to. Is that still the case that you do expect to pay up, if there is a significant increase?

You mean pay more?

Pay more, depending on the pricing.

Not necessarily. That is not necessarily accurate what you are saying. It depends on the time of the year. Our peak season will be more aggressive, but off-peak season we will not be too.

Thank you.

Ed Woo, Wedbush Morgan.

Great. Good quarter. I had a question, have you noticed any change in consumer in terms of customers, whether there is any patterns of people buying in terms of may be closer toward end of the month, or maybe in geography?

We have not noticed any change from prior years.

Great. I am not sure if you ever give this metrics out, but what percentage of your customers qualify for the free shipping?

About roughly 80%.

Has there been any change in that?

No.

Great. Thanks a lot.

Kristine Koerber, JMP Securities.

Hi, this is Jennifer Bennett filling in for Kristine. A follow-on to one of the last questions, have you seen vets being more promotional with their pet medications in this more difficult environment?

I would say it was similar to last year. We have not seen them to be more promotional than last year this year, so they have been aggressive.

But not any more aggressive than last year?

We don't think so, no.

Okay, then my second question is did weather play any role on results this quarter?

It's difficult to tell. I haven't really paid attention if this June was hotter than last June, but it's our peaks season so -- what we have heard was the veterinarian sales were down. Overall market was down is what we heard, but I don't have hard data to verify that.

Okay, thank you.

Sasha Kostadinov, Shaker Investments.

Thank you very much. The inventory number, did you have some opportunistic buys during the quarter? What was the reason for the increase?

It's just a timing issue. Yes, we did have some buying opportunities, so I would anticipate inventory to come down as the year goes by.

All right, thanks a lot. Great quarter.

Thank you.

[Stan Westhoff, Wallhausen and Company.]

Actually, the inventory question was one of my questions, but I just had some things that with retail or reorders sales -- I kind of missed them when I first got on the call. Can you kind of re-go over those -- the retail reorders--?

Retail reorder sales increased by 16% to $46.2 million for the quarter. That was compared to reorder sales of $40 million for the same quarter last year.

Okay, and the retail new orders?

Increased by 17% to $22.1 million and that is compared to $19 million for the same quarter last year.

What was the average retail order?

$87.

Then just the Internet sales, and that will be it for me.

64% of sales were Internet.

Okay, great. Thanks. Great quarter.

Ken Smith, Munder Capital.

Hi, can you just on a cash balance last quarter, I think you had re-classed about $24 million to long term for auction-rate securities. It looks like that has decreased this quarter.

Yes.

What is the reason for re-classing it back to current?

We sold them.

Then the remaining balance in long-term, what is the plan or outlook there?

We are attempting to sell them, so we will see what happens.

Okay, thank you.

(OPERATOR INSTRUCTIONS). I would now like to turn the meeting back over to the speaker.

Thank you. We will continue 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. 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. And thank you for participating. You may now disconnect.