Petmed Express Inc (PETS) 2008 Q3 法說會逐字稿

Welcome to the PetMed Express Inc. doing business as 1-800-pet-meds conference call to review the financial results for the third fiscal quarter ended on December 31, 2008. At the request of the Company this conference call is being recorded. Founded in 1996, 1-800-pet-meds 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-pet-meds markets its products through national television, on-line, direct mail, and print advertising campaigns which directs consumers to order by phone or on the Internet and to aim to increase the recognition of 1-800-pet-meds brand name. 1-800-pet-meds 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 Akdag, our President and Chief Executive Officer, 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, that's 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 statement.

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, President and Chief Executive Officer of 1-800-pet-meds. Mendo.

Thank you, Bruce. Welcome everyone. Thank you for join 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, 2008, to last year's quarter and nine months ended on December 31, 2007. For the third fiscal quarter ended on December 31, 2008, our sales were $43.4 million, compared to sales of $37.3 million for the same period the prior year. An increase of 16%. For the nine months ended on December 31, 2008, our sales were $171.3 million, compared to sales of $147.9 million for the nine months the prior year, also an increase of 16%. The increase was due to increased reorders and new orders.

For the third fiscal quarter, net income was $4.9 million, or $0.21 diluted per share, compared to $4.4 million, or $0.18 diluted per share for the same quarter the prior year, an increase to earnings per share of 15%. For the nine months, net income was $17.3 million, or $0.73 diluted per share, compared to $15.1 million, or $0.62 diluted per share a year ago, an increase to earnings per share of 18%. Reorders sales increased by 13% to $32.2 million for the quarter, compared to reorder sales of $28.4 million for the same quarter the prior year. For the nine months, the reorder sales increased by 16% to $119.6 million, compared to $103.4 million for the same period a year ago.

New order sales increased to 25% to $11.2 million for the quarter, compared to $9 million for the same period the prior year. The increase in new order sales can directly be attributed to an 18% increase in advertising spending with a better return compared to the same quarter last year. For the nine months, the new order sales increased by 16% to $51.6 million, compared to $44.4 million for the same period last year.

We acquired approximately 154,000 new customers in our third fiscal quarter compared to 127,000 for the same period the prior year. And we acquired approximately 660,000 new customers in nine months compared to 585,000 for the same period a year ago. Our average retail order was approximately $78 for the quarter, compared to $76 for the same quarter the prior year, and approximately 66% 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 season, with fall and winter being the off seasons.

For the third fiscal quarter, our gross profit as a percent of sales was 39.9%, compared to 40.6% for the same period a year ago. For the nine months, our gross profit as a percent of sales was 38.5% compared to 38.9% for the nine months a year ago. The percentage decrease can be attributed to increased product costs offset by the impact or reduction in freight expenses due to a shift from priority to standard shipping.

Our general and administrative expenses as a percent of sales decreased to 11.6% for the quarter, compared to 12.2% for the same quarter the prior year. And for the nine months, the G&A expenses as a percent of sales were 9.6%, compared to 10.5% a year ago. The improvement shows leverage of the G&A. For the quarter, we spent $4.9 million in advertising, compared to $4.2 million for the same quarter the prior year, an increase of 18%. For the nine months, we spent $23.6 million for advertising, compared to $20.7 million a year ago, an increase of 14%.

Advertising costs of requiring our customer for the quarter was approximately $32, compared to $33 for the same quarter the prior year. And for the nine months it was $36, compared to $35 for the same period a year ago. Our working capital increased by $20.3 million to $59.1 million since March 31, 2008. The increase can mainly be attributed to cash flow generated from operations and reduction of long-term auction-rate securities investment.

We had $43.7 million in cash and temporary investments, and $14.7 million in long-term auction-rate securities investments and $19.7 million in inventory with no debt as of December 31, 2008. Net cash from operations for the nine months was $15.8 million compared to net cash from operations of $9.9 million for the same period last year, an increase of 60%. In accordance with our share repurchase program, we repurchased approximately 336,000 shares, paying approximately $4.6 million during the quarter. And for the nine months, we repurchased approximately 518,000 shares, paying approximately $6.8 million.

Capital expenditures for the nine months were approximately $3.5 million, which included the warehouse expansion and automation, and infrastructure update. Overall, we are pleased with the results. The new order growth was encouraging, and is an indication of consumers turning to 1-800-pet-meds to save time and money. Also, the favorable advertising environment enabled us to reach more of these new consumers during the quarter. This ends the financial review. We are ready to take questions.

Thank you. We will now begin the formal question-and-answer session. (Operator Instructions) One moment, please. Mark Arnold of Piper Jaffray, you may ask your question.

You mentioned the new customer growth was obviously very strong in the quarter. You hit on this at the end of your prepared remarks, but do you have any way to gauge how much of that strength is related to the effectiveness of your targeted advertising versus customers maybe seeking out cheaper alternatives or more convenient alternatives to visiting their veterinary clinic given the state of the economy right now?

That's difficult to point to. Having said that, obviously, we spent more money, we spent about 18% more in the December quarter, compared to the same quarter last year, and our dollar-wise revenue, new orders grew 25%, so we gained basically 7%, which is -- we got a better result. We got $32 customer acquisition cost this quarter compared to $33 same quarter last year. So it was a better -- a little better response, and average order size was a little higher.

Okay. I knew that was a hard question. It would be interesting to -- I'm sure you'd be interested as well, trying to understand what's really driving that. One other follow-up on that, given that veterinary clinic visits in the fall here have been down a bit, historically, when veterinary clinic visits have been down is that a good or a bad thing for your business?

It is -- my guess is going to be it's probably a good thing. If they're not going to the vets, they're more likely to refill their pet medications through sources like us.

But you don't typically see a drop off in the amount filled, they're filling it in a different place?

No.

Then one final question from me. The advertising environment, you said it was favorable. Do you have any sense of how you see that shaping up here in the next few quarters or any visibility as to whether that's going to remain attractive for you guys going forward here?

My guess will be it should remain favorable to us.

Okay. Thank you very much.

You are welcome.

Kristine Koerber at JMP, you may ask your question.

First of all, can you talk about any change in trends as far as consumer spending behavior during the quarter? Was it pretty consistent.

It's fairly consistent for us. The reorder growth was a little soft, which may be due to a decline in medication compliance by pet owners. Having said that, I wouldn't read too much into it since it was our off-peak season. But we will watch if that trend continues.

Okay. And as far as gross margin, you talked about gross margin being down a little bit because of product costs. Can you talk about pricing? I know you were planning on being a little more aggressive with the pricing during the quarter. Were you any more aggressive than initially planned?

We were not any more aggressive than what we initially planned, but we gave additional discounts to our customers in the current economic environment, consumers are seeking sales, so we gave them what they're looking for, and we did that to help medication compliance.

Can you just comment on the competition? Were they extremely aggressive on discounting?

Really we focus on the veterinarians. That's where the market share is coming from, and there was no difference in competition compared to last year.

Thank you.

Mike Kupinski of Noble Financial, you may ask your question.

I just got a couple questions. One, if you can just go over for us what your thoughts are on your advertising campaign? You changed to the more animated characters, that sort of thing. Was wondering if you saw any type of increased return just based on just the ads themselves? I know obviously your new customer growth and so forth, and you had a favorable environment, but just wondering what your thoughts were about the advertising itself? Then I have a couple of quick follow-up questions.

We think the new creative performed well.

Okay. And so you don't really plan any changes with the animated characters or looking at any changes on the creative?

No. Not at this time, no.

Then G&A seemed to decrease a little bit more than expected. Do you have any thoughts on what that line item is going to look like going forward?

I would anticipate some continuing leverage on the G&A line.

Okay. And I think that's all I have for now. Thank you.

You are welcome.

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

Got a couple questions from me. Regarding your sales, can you comment as far as sales by region? Did you see any notable differences during the quarter?

No, not any material difference from same quarter last year.

And as far as the gross margin, you had commented a little bit about that, then you also mentioned that you did some discounting during the quarter. What are your plans for this quarter, and perhaps maybe sort of what's your take on where you think you will go ahead with the product pricing during the next few quarters?

As I said in the current economic environment, consumers are seeking sales, so we'll satisfy that request by the public, and we will be more aggressive price-wise.

Okay. And my last question is regarding the tax rate, which did -- was a tad lower than I expected. Any reason for that? And also, what are your expectations for for the March quarter tax rate?

The percentage decrease can be attributed to higher tax benefits from stock-based compensation options for the quarter. Compared to the same quarter last year. For the year, our estimate is about 35 to 36%.

Okay. Thank you.

You are welcome.

Mitch Bartlett of Craig-Hallum, you may ask your question.

I wonder if you could just talk in a little bit more depth on the average order value, the average order size, and how that continues to do fairly well. Is that just price inflation, or is there a mix shift, or is there anything -- any component of that? Then also if you could just maybe touch on the customers and their repeat frequency. Are they coming back more on? Are they coming back for a different set of product? Just whatever you can add to that equation.

Okay. The average order size increase, I would say roughly half of the increase is due to price increases, and the other half due to up-selling and cross-selling.

Okay.

The product mix was a little different due to us focusing more on chronic illness.

So more pain medication and that type of thing?

Yes.

Great. And on competition, a number of us, I think, have noticed that Amazon seems to be fairly aggressive on price these days, but you are saying that your fight is against the vets. Does it not matter that the rest of the channel gets more competitive, the rest of the direct marketing channel gets more competitive, or are you just taking share from the vets at this point?

We're taking share. The share is coming from the vets. We are a one-stop shop. We are licensed pharmacy to conduct business in all 50 states. Most of the competition, including the name that you mentioned, it's highly unlikely that they will ever get into prescription medications. Also with our advertising, and brand-name recognition, we are known to the public as pet medication experts. This and our service level are the keys for our future success, no matter who enters the market. And there was probably some excess inventory in the market, and it would be surprising if such deep discounts can be sustained in the long term.

Is it showing up on your price matching at all, the deep discounts? And when did it start maybe?

Not any more than it did before.

Very good, thank you.

You are welcome.

(Operator Instructions) Ed Woo of Wedbush, you may ask your question.

Was there any difference in the performance between your prescription and nonprescription products, and what's the percentage of your products from nonprescription?

For the year are it's 70% over the counter, and 30% prescription. But off-peak season it skews more to prescription. There's more prescription and less OTC. Still, OTC is the majority, but the prescription is higher than 30% during our off-peak season. It ranges to 40 to 42% range.

Do you see any changes, other than normal seasonality, in terms of people buying more or any effect from the retail weakness?

It was a bit more skewed to prescription this off-peak season compared to last year.

And on an administrative question, how long are pet prescriptions usually good for before somebody would have to go back to a vet to be able to order medicine?

It's good for one year.

Great. Thank you.

You are welcome.

(Operator Instructions) Mitch Bartlett, Craig-Hallum, you may ask your question.

The capital expenditure, the amount that you were going to invest in the expansion of the warehouse and the call center and the like, has that been completed basically at this point?

Almost completed. We are very close.

And that went well?

Yes.

So how much additional dollars do you think you will spend in the fourth quarter?

I would -- $0.5 million, another $0.5, maybe.

Thanks. That's all I have.

There are no further questions at this time.

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. This ends the conference call.

Thank you.