Petmed Express Inc (PETS) 2008 Q4 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 fiscal year ended on March 31, 2009. 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 phone or on the Internet and to aim the increased 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. Sir, you may begin.

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 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. Mendo?

Thank you, Bruce. Welcome, everyone. Thank you for joining us. Today, we will review the highlights of our financial results. We will compare our fourth fiscal quarter and fiscal year ended on March 31, 2009 to last year's quarter and fiscal year ended on March 31, 2008.

For the fourth fiscal quarter ended on March 31, 2009, sales were $48.1 million compared to sales of $40.4 million for the same period the prior year, an increase of 19%. For the fiscal year ended on March 31, 2009, sales were $219.4 million compared to $188.3 million for the prior fiscal year, an increase of 17%. The increase was due to increased reorders and new orders.

For the fourth fiscal quarter, net income was $5.6 million, or $0.25 diluted per share, compared to $4.9 million, or $0.20 diluted per share for the same quarter in the prior year, an increase to earnings per share of 20%. For the fiscal year, net income was $23 million, or $0.98 diluted per share, compared to $20 million, or $0.82 diluted per share a year ago, an increase to earnings per share of 19%.

Reorder sales increased by 20% to $37.2 million for the quarter compared to reorder sales of $31 million for the same quarter the prior year. For the fiscal year, the reorder sales increased by 17% to $156.8 million compared to $134.3 million for the prior year.

New order sales increased by 15% to $10.8 million for the quarter compared to $9.4 million for the same period the prior year. For the fiscal year, the new order sales increased by 16% to $62.5 million compared to $53.8 million for the prior year.

We acquired approximately 142,000 new customers in our fourth fiscal quarter compared to 126,000 for the same period the prior year. And we acquired approximately 802,000 new customers in the fiscal year compared to 710,000 for the prior year.

Our average order was approximately $82 for both the quarter and the fiscal year compared to $80 for the prior fiscal year. And approximately 65% of our sales were generated on our website for the fiscal 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 40.3% compared to 41.3% for the same period a year ago. For the fiscal year, our gross profit as a percent of sales was 38.9% compared to 39.4% for the prior year. The percentage decrease can mainly be attributed to increased product costs offset by the impact of reduction in freight expenses due to a shift from priority to standard shipping.

Our general and administrative expenses as a percent of sales were 10.7% for the quarter compared to 12% for the same quarter the prior year and for the fiscal year, the G&A was 9.8% compared to 10.8% for the prior year. The improvement shows leverage of the G&A.

For the quarter, we spent $5.1 million for advertising compared to $4.5 million for the same quarter the prior year, an increase of 12%. For the fiscal year, we spent $28.7 million for advertising compared to $25.3 million for the prior fiscal year, an increase of 14%. Advertising costs of acquiring a customer for both the quarter and the fiscal year was approximately $36, which was the same as it was for the prior fiscal year.

Our working capital increased by $15.8 million to $54.6 million since March 31, 2008. The increase can mainly be attributed to cash flow generated from operations and redemption of long-term auction-rate securities offset by the repurchase of shares pursuant to our stock buyback plan.

We had $30.1 million in cash and temporary investments, $14.4 million in long-term auction-rate securities investments and $26.8 million in inventory with no debt as of March 31, 2009. Net cash from operations for the fiscal year was $15 million compared to net cash from operations of $19.4 million for the prior fiscal year. The primary reason for the reduction was an increase in inventories due to the Company taking advantage of buying opportunities.

In accordance with our share repurchase program, we repurchased approximately 829,000 shares, paying approximately $11.7 million during the quarter and for the fiscal year, we repurchased approximately 1.347 million shares, paying approximately $18.4 million.

Capital expenditures for the fiscal year were approximately $4 million, which included warehouse expansion and automation and infrastructure updates. Overall, we are pleased with the results. This ends the financial review. Operator, we're ready to take questions.

(Operator Instructions). Mark Miller, William Blair.

Hi, good morning, everyone. Could you, I guess, discuss the acceleration that we saw here in the reorder sales growth rate? Do you think we will see that continue or how much of that do you think was due to easier comparison? And then perhaps in conjunction with that, do you think that the earlier break in Spring with temps being a little bit warmer year on year in March might have helped the flea, tick business and if so, is that something that pulls forward sales or might that be added to the selling season?

It is possible, what you said, the second part of it. Reorders were strong. It is typically -- reorders are strong our off-peak season, Fall and Winter. There is less competition probably and that is one of the reasons, and during peak seasons, it is not as strong. But overall, how we look at it is reorders as a percent of prior year's total sales and it was a little better in fiscal 2009 compared to 2008.

When you said it is possible that it could be a pull-forward, does that mean that you might have seen a slowing in April or just it's hard to tell?

No, it's hard to tell. Yes, I am not going to discuss April at this point. We will do that in July.

Okay. We will be tuned in. You talked about the warehouse automation. Can you just give us an update on how that is going and have we seen impact on the financials yet from that?

We have not seen an impact on the financials yet. We started using it in about 30% to 40% of the orders at this time. We will probably see the impact in the next three months.

Okay. My last question is how do you perceive the new creative to be going? Is it a measurable impact versus the prior campaign? Thanks a lot.

Since the time is different, it is difficult to tell whether it is the year, whether -- when you are comparing, obviously there are multiple variables, but the new creative is doing well. In the March quarter, the customer acquisition cost was pretty much flat at $36 and it was the same as the quarter of the prior year.

Kristine Koerber, JMP Securities.

Yes, hi. Can you talk about the competitive environment and kind of what you're seeing? Is the competition getting more aggressive with discounting? And then I was hoping you would talk about maybe trends throughout the quarter. Were trends pretty consistent throughout the quarter?

The competition I would say is similar to last year. We are not really seeing anything different, but it has been competitive the last few years. And during peak season, that gets more competitive. We spent over $150 million on our brand and our brand name recognition helps us. We are also a one-stop shop. We stock both prescription and nonprescription medications. The majority of the competition, other than the veterinarians, do not sell prescription medications. So that helps us with the competition. And service is the key; price is not everything. So our focus is a service advantage and a cost advantage compared to the competition.

As far as the quarter is concerned, it usually picks up -- starts -- the sales start increasing in March actually and continues to increase probably May, June -- May probably is the highest sales, it starts flattening. It is typically that's how it has been in the prior years.

Okay and then just one last question, as far as the product costs, you mentioned higher product costs contributing to gross margin pressure. Can you just elaborate on that, please?

Our focus really is maximizing the gross profit dollars and we understand that we have to be competitive and we do price-sensitivity testing the markets and attempt to maximize the gross profit dollars. We do not pay too much attention to the gross profit percent, but as you can see, there has been pressures on it and I would anticipate continuing pressure on it. And hopefully, we will make that up with leveraging the general operating expenses.

Thank you.

Mark Arnold, Piper Jaffray.

Good morning. Nice quarter, guys. Just to start with, the G&A line, your performance there was really impressive in the quarter. I am just curious if there were any specific cost-savings initiatives that you instituted to drive that or is it just good solid cost controls in the quarter?

I would say good solid cost controls. We are focusing on efficiency as far as payroll is concerned and that helped us. We are more efficient with payroll, maximizing the capacity of each resource that we have. So it looks good.

Okay. Then this is a forward-looking question, but is there any visibility you can provide us kind of on your ad spending targets for 2010?

Our budget in dollars is going to be higher than last year. As a percent, it's a different ballgame, as you know. We will attempt to spend more in dollars. Obviously it is going to depend on if there is remnant space available, etc. whether we can spend the money or not. But we're going to definitely attempt it.

How are you seeing the supply of that remnant ad space here through the first quarter and through the first part of calendar 2009 so far?

March quarter, as you could see, we spent more money. We spent about 12% more, $5.1 million in the March quarter, compared to $4.5 million for the same quarter the prior year. So we were able to spend 12% more. It is a little too soon to tell what is going to happen in the June quarter. We'll see how it shakes out.

My (inaudible) on CNBC all day long, so I know you are spending.

That's good to hear.

Just a couple more. Can you update us on where you stand with your stock repurchase authorization?

I believe we have about $10 million left in the stock repurchase plan.

Okay. And then just one last one. There have been a number of EPA warnings and press releases recently regarding the safety of many of the flea and tick medications. And I guess can you just talk a little bit about this and any potential impact, if any, it could have on your business as we head into the strong seasonal period for these products?

This is really nothing new. A small percent of the pets always has been reacting to some of the medications. Most of our customers have been using the same brands and they have been happy with them. The issue has just been publicized. I don't know if it is going to have any impact or not; it is really difficult for me to tell.

So is it fair to say if you haven't had an adverse reaction using this product, you are probably not going to have any impact?

I would say so. I would say so. That's a fair statement.

Great, thank you, guys. Nice quarter.

Thank you.

Mitch Bartlett, Craig-Hallum.

Yes, I wonder if you could talk to, in a little more detail -- you already touched on it -- but the price competition out there seems to be fairly vicious when you look at Amazon, depending on the product, could be 30%, 35% below your prices. And then I noticed -- the second question would be about -- I notice that there appears to be more of the flea and tick medications that are available at retail. Target is carrying them and the like. And perhaps could you -- the third question would be could you speak to the -- what may or may not be Frontline rolling off patent this summertime? And I noticed on your website there is a very strong message at the checkout page for folks to switch into either another brand or in the case of Heartgard, a generic. Could you touch on that as well?

Boy, you asked a lot of questions, so let's see where I can start here. What I would tell you is flea and tick is highly competitive, so obviously a lot of retailers have entered the business. As you may know, we do not just sell flea and tick; we are a one-stop shop for pet medications, prescription and over-the-counter. Flea and tick preventatives are over-the-counter. The vast majority of retailers do not participate in the prescription medication. So that gives us a competitive advantage.

And as I have pointed out, we spent over $150 million on our brand and we have our brand name recognition with the public. We are known to the public as pet medication experts and this helps us and also at the end of the day, we are going to be competitive pricewise, but we are not going to be the least expensive. Our service level and our brand name recognition have been the key for our success and we believe will continue to be that.

As far as the recommending other brands, we have been doing that for the last six, seven years, so that is nothing new. If we think there is an advantage to the consumer, we will continue to do that.

And Frontline coming off patent? I presume that that is your largest selling --?

I think the ingredients in the Frontline is coming off patent. I don't think the usage is coming off patent at this time. That is my understanding.

Do you expect to see a generic of some sort in the marketplace?

Probably. I would not be surprised. I know some manufacturers are lining up to do that.

Thanks very much.

Anthony Lebiedzinski, Sidoti & Co.

Good morning. Your new customer acquisition cost was actually a little bit higher than what we were expecting. I was just wondering if you guys changed the mix of advertising to perhaps more online, less TV. Maybe you could just talk about that if you can.

I don't think there was any material change this quarter, I mean March quarter compared to the same quarter last year. We spent more money, so any time you spend more dollars, about 12% more, it may not be as efficient, every dollar that you add to it. Incremental impact may not be as efficient, but we are happy with the $36.

Okay. Also, postal rates are going up today. Just wondering what your strategy is with dealing with that?

What we usually do is, at the end of the peak season, we will pass some of the cost increases to the customer, but we will evaluate that at the end of the peak season.

Okay. And then a couple of other quick questions here. What do you attribute the average order size increasing to? And also if you could just tell us if there has been any material change to the product mix, prescription versus nonprescription.

I will answer your last question first. There is a slight change. Prescription was 31% of the business for the fiscal year compared to 30% last year. It is a 1% basically change. As far as average order size, we do slight increases on our prices. We pass some of the cost increases to the consumer once a year, so obviously that will have an impact, plus upselling and cross-selling.

Okay, thank you.

(Operator Instructions). Ed Woo, Wedbush Morgan.

What is the percentage of sales [as] flea and tick and has that changed at all?

Due to competitive reasons, we do not disclose that information.

Okay. And was there any trends you saw in geographic order pattern?

No, no, nothing material.

Okay, thank you.

Michael Kupinski, Noble Financial.

Thank you for taking the question and congratulations on your quarter. Just a quick couple of questions here. I was just wondering if you can talk about your TV yields in the quarter and how they compared with the previous quarter. And then secondly, we are hearing that -- I'm sorry? Yes, TV yields?

I am not clear what you mean with that, but I am not going to break up our advertising as far as how each channel is performing, if that is what you are asking, TV versus online versus print. I am not going to get into that kind of detail due to competitive reasons.

Yes, Mendo, I was just wondering in terms of the yields on your revenue per spend on TV, if you can just give me how -- if that just was up or down versus the previous quarter.

Oh, our TV spending you mean?

Correct.

It was slightly up. It was slightly up, yes.

Okay, and in terms of the -- we are hearing that scatter prices now are firming up pretty aggressively and that, in some cases, for some networks, that the scatter prices are now above last year's upfront, which is kind of indicating that maybe the upfront for cable networks is going to be a little bit stronger than expected. Do you have any thoughts on -- and you did indicate that your budget is going to increase. Are you anticipating that you are going to have to spend materially higher for advertising built into the budget or -- I was just wanting you to give us a little color on what your thoughts are in terms of your network spend?

The reason we attempt to spend more dollars is obviously to grow the business, to grow the top line. So the goal is capturing marketshare. So always our budget is going to be higher dollars in dollars compared to the prior year. Cable is doing fine this year compared to last year, so it is not hurting as much. It appears there may be some shift from networks to cable stations.

Okay. So in terms of the budget for the next quarter that you said was going to be up, do you have any thoughts in terms of what you are planning for in terms of your -- just from price increases?

It doesn't mean it is due to price increases. Really what it means is we are attempting to capture marketshare to grow the top line and that is the reason that our budget is higher. That doesn't mean that we are paying more if that is what you are asking.

Okay, perfect. Thank you so much.

Ross Taylor, CL King.

Hi, just have one question. You mentioned in your last conference call that you thought some of the low-price competition that had developed might have been driven by an excess of cheap inventory in the channel and I just wondered if you had seen any change in that situation.

No, we have not seen any change. So inventory is still available. Obviously manufacturers want to make their numbers. So if their sales are soft, the inventory is going to be available.

Okay, thank you.

Mitch Bartlett, Craig-Hallum

Yes, I think you answered most of them. I did want to go back to the guy who started at the very beginning. He was talking about it being a warmer Spring. I didn't know that. Is there a way you track that or how do you measure that?

I mean, look, we looked at the weather, but I mean we are not an expert as far as the weather is concerned, so I am not going to get into making comments due to the weather. Sometimes we get puzzled. Even when it is warm, the sales are not there. When it is not warm, the sales are there. So it is really difficult to judge that.

Good enough. Thanks.

At this time, I would like to turn the call back over to 1-800-PetMeds executive management.

Thank you. According to the American Pet Products Manufacturers Association, spending on pets in the US increased by about 5% and reached $43.4 billion in 2008. The pet supplies and medicine category also grew approximately 5% and reached $10.3 billion. There is a continuing increase in pet-related spending, a higher unawareness of pet health and the continued humanization of pets, integrating them into all aspects of our lives.

To capitalize on this trend, we will be focusing our efforts on three areas. One, capturing additional marketshare; 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, everyone, for participating in today's conference. You may disconnect now at this time.