Petmed Express Inc (PETS) 2009 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, 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 medication 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 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 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, 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 President and Chief Executive Officer 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 first fiscal quarter ended on June 30, 2009 to last year's quarter ended on June 30, 2008.

For the first fiscal quarter ended on June 30, 2009, sales were $77.2 million compared to sales of $68.4 million for the same period the prior year, an increase of 13%.The increase was due to increased reorders and new orders.

For the first fiscal quarter, net income was $8.1 million or $0.36 diluted per share compared to $6.6 million or $0.28 diluted per share for the same quarter last year, an increase to earnings per share of 27%.

Reorder sales increased by 17% to $54 million for the quarter compared to reorder sales of $46.2 million for the same quarter the prior year.

New order sales increased by 5% to $23.2 million for the quarter compared to $22.1 million for the same quarter the prior year.

We acquired approximately 297,000 new customers in our first fiscal quarter compared to 267,000 for the same period the prior year.

Our average order was approximately $84 for the quarter compared to $87 for the same quarter the prior year. The decline was due to some customers buying smaller quantities, for example, three-packs rather than six-packs, which may be due to the current economic conditions.

Approximately 67% of our sales were generated on our website for the quarter compared to 64% for the same period the prior 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 seasons.

For the first fiscal quarter our gross profit as a percent of sales was 38% compared to 37.7% for the same period a year ago. The percentage increase can be attributed to the impact of reduction in freight expenses due to a shift from priority to standard shipping, offset by increased product costs.

Our general and administrative expenses as a percent of sales were 8.4% for the first fiscal quarter compared to 8.5% for the same quarter the prior year. The improvement shows slight leverage of the G&A.

We spent $9.9 million in advertising for the quarter compared to $10.1 million for the same quarter the prior year, a decrease of about 2%. The decrease was partially due to there not being any additional remnant TV advertising inventory available during the quarter. The decrease was also partially due to our paying less per eyeball. This resulted in a reduction in the advertising costs of acquiring a customer, $33 for the quarter compared to $38 for the same quarter the prior year.

Our working capital increased by $9.5 million to $64.1 million since March 31, 2009. The increase can mainly be attributed to cash flow generated from operations. We had $59.5 million in cash and cash equivalents, $14.4 million in long-term auction rate securities investments and $16.1 million in inventory, with no debt as of June 30, 2009.

Net cash from operations for the quarter was $29.3 million compared to net cash from operations of $6.6 million for the same quarter the prior year. The significant increase was primarily due to a decrease in inventories and an increase in payables.

Capital expenditures for the quarter were approximately $154,000.

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

(Operator Instructions) Kristine Koerber, JMP Securities.

Congratulations on a good quarter. A couple of questions. Can you just talk a little more about the advertising environment? You said there was a lack of remnant space. Any reason for that, especially given the environment and kind of the trends you saw during the quarter and what you are expecting going forward?

Okay. We were surprised too with there being no additional remnant TV inventory. The reason was TV cable stations used the inventory to make up for the commitments to their general advertisers. Going forward typically in the third quarter, which is the September quarter, there should be more remnant space availability. That is our anticipation, but we anticipated that in the June quarter too, which was not the case.

And then one other question. You just talked about competitive environment and pricing. Were you more aggressive on -- I mean, the -- obviously gross margin looked good during the quarter, but how were you on promotional pricing during the quarter?

I don't think it was any different than prior years, but our presentation was different than the prior year. So it might have given the perception that we have given deeper discounts.

But you didn't?

Well, if you look at the gross profit per shot, obviously we didn't.

Thank you.

Mark Arnold, Piper Jaffray.

Good morning. Great quarter guys.

Thank you.

I just want to follow up on the comment about the transaction size being down. What does that mean for sales later this year, given -- as an example, you gave people purchasing three-packs versus six-packs. How do you guys expect that to play out in terms of maybe a positive impact in the last couple of quarters of the year?

Hopefully they're going to buy another three-pack in the September quarter. So that's what we're hoping for.

When you saw that type of behavior occur, is it in the seasonal products or just across the board in all the different types of products you offer? Any commentary you can provide on that?

More on seasonal products.

Okay. Then I wanted to follow up on the cash flows as well. Pretty strong cash flows. Your cash balance has grown here nicely. You talked about some of the working capital adjustments. But what are your priorities in terms of using that cash? Can you talk about that in general? I know you've bought back stock in the past, but can you talk just about your general priorities, maybe in order, about using that pretty significant cash balance going forward?

I believe we still have about $10 million left on our stock buyback plan. So that is the only thing really that is pending at this time.

Okay. And then just one last question. We saw the -- we talked about the transaction size falling. How does that carry over? What does that mean toward your ability to leverage the freight costs on your shipments? What have you been able to do to continue to manage those margins, given I would assume there is some fixed element of that freight cost regardless of the transaction size?

The reduction in the freight expenses was due to a shift from priority to standard shipping. But going forward it is going to be a more apples to apples comparison. We went to standard shipping in stages last year. We started slowly to make sure that customers were not unhappy with it, and we have done it in stages, but I think for the September quarter it's going to be a more apples to apples comparison.

So because of that, we anniversary those changes that you had started making I think in the June quarter last year. So it is going to make managing that transaction size more important to managing the freight costs going forward?

That is a fair comment, yes.

Great. Nice quarter guys.

Thank you.

Anthony Lebiedzinski, Sidoti & Company.

Couple of questions to expand on the first caller here about the -- how you changed your presentation. Can you give us a little bit -- some detail about that, and also just touch on whether you expect the gross margin to be up as well, at least in the near term?

Changing the presentation -- I'm not clear what you mean with that.

Well, you said in response to the first caller's question that you changed -- that the presentation was different in terms of the (multiple speakers)

Oh, you're talking about the discounts?

Yes, yes. Can you just give us a little bit more detail about that and whether you think this is something that you will continue to do?

It was successful in June quarter. So with that in mind, we will probably likely do more of it.

And also could you just touch on maybe trends by region? And also was there any impact from the weather? It was certainly, at least in the northern part of the country, cold and wet for the most part. So can you just touch on that please, as well?

I don't think there was any material difference. I'm not sure how the weather impacts it or not, but as far as the trend is concerned, I don't think there was any material difference this June quarter compared to the last year.

Okay. All right, thank you.

Ed Woo, Wedbush.

I apologize, but can you repeat what the average order size was in the quarter?

Sure. $84.

Also was there any change in product mix in the quarter?

Slightly more prescription medications we sold in the quarter than the same quarter the prior year.

The last question I have is, there's been a lot of discussion about sales tax. How much of your product is applicable for sales tax?

We only charge sales tax in Florida and in Georgia. So the rest of the states we do not.

Are most of your products non -- applicable to sales tax for the (multiple speakers)

Over the counter medications are taxable, prescription medications are not taxable.

Great. Thank you.

You're welcome.

Michael Kupinski, Noble Financial.

Thanks for taking the question, and congratulations on your quarter.

I was just wondering, most of my questions have been answered, but I just had a couple of quick ones here. In terms of new order sales, obviously showing some deceleration from the prior quarter. I was curious if the company is reviewing its advertising message and maybe considering making changes to its creative, given the prospect that advertising might be getting a little stale?

We don't think it was due to the message. The reason was, there was not enough -- or any additional, I should say, remnant TV inventory available during this quarter. That is why we spent about 2% less than the same quarter of the prior year.

Do you think that the message, it was purely because of the advertising number itself that you were able to -- you weren't able to spend as much as you would hope? That is because (multiple speakers). Okay.

We also paid for less per eyeball.

And I was just wondering in terms of the facility expansion that you had, I was wondering if you could give us any updates. Are you utilizing the whole facility at this time? What is going on with that expansion?

We're -- it's still -- the warehouse automation is still not complete, so we are still in the first phase. We completed the first phase, but the second phase has not been completed yet. So we are anticipating that within the next three months.

And Mendo, is there any reason why it has taken so long to get that online? Because it seems like it has been a while that you're trying to get it online. Are you just phasing it in? Or what exactly are -- were the plans there when you went through the facility expansion?

We had some technical problems, and we are in our peak season, and we don't want to interrupt the operation at this point, so we'd rather wait till the volume slows down for the second phase.

Well, was the technical problems more the automation, the -- or what was the nature of the technical problems?

Automation.

Okay. All right. Thank you very much. That's what I had.

Mark Miller, William Blair.

The percentage of customers that are on the website that are buying, it looks like that's been coming up really over the last two years. I'm wondering if you can speak to that in this current period. Is that conversion rate still coming up? Why do think that trend has been in place?

It was 67% for the June quarter as compared to 64% for the same quarter last year. So it is a 3% increase. I think the consumer is becoming more comfortable ordering online. I would say that is the main reason for the increase, and I would anticipate it to continue to increase.

I'm speaking about actually the -- in your 10-K you disclosed the number of customers that are on the site, and then we can also see the number of purchases. So the conversion rate has actually been coming (multiple speakers)

Oh, the conversion was up you mean?

Yes.

It depends on what kind of visitors we bring in, so we run different -- for campaigns different promotions, and some campaigns can bring unqualified visitors and some campaigns will bring highly qualified visitors. So that will dictate the conversion.

Is that a number you focus on in particular? And (multiple speakers)

Yes. We look at that every week, and it has been improving.

Is that -- do you feel like that is at a stable level, or do you think that that can go up further based on your initiatives?

It could go up based on our initiatives.

Okay, thanks. My other question is around the inventory, and the company in the prior quarter had had a significant year-to-year increase in inventory. I was wondering if those opportunistic purchases had helped you in this quarter?

Yes, it absolutely did, and you can see it in the gross profit percent.

And then a follow-on and my last question to that is, the inventories now at the end of June are lower than the prior-year period. In the past, usually in the subsequent quarter, gross margins have as a consequence fallen. Should I read into this that there is maybe less opportunistic product available to you in the near term?

You could probably. Our inventory is going to fluctuate based on whether there are any favorable buying opportunities or not. So you probably can read that, yes.

And then just why would there be less available right now, given the current economic circumstances?

It doesn't necessarily mean it's less available. It's just -- it's a -- boils down to promotions. If the promotion is available the following quarter, we are not going to stock up. So the -- our inventory increase in the March quarter was due to us buying at 2008 prices, and in 2009 there were price increases.

Okay. A terrific quarter. Thanks.

Ross Taylor, C.L. King.

Hi. Most of my questions have been answered, but maybe I have two left. First, your cost to acquire the new customer dropped to $33 from $38 last year. And was all of this just driven by lower rates per ad? Or was there some greater efficiency in your new advertising message or something else that drove this improvement?

Part of it was due to paying less per eyeball and part of it was due to just higher conversion.

Okay. My second and last question is, in your press release you mentioned driving reorder sales with some health education content. Is that any material change from what you have done previously in terms of trying to drive new orders -- or drive reorders from existing customers?

We're always working on it. I can't say there was a material change in the June quarter, but the reorders were strong, as they grew 17% in the quarter.

All right. That helps. Thanks very much.

You're welcome.

Mitchell Bartlett, Craig-Hallum.

Yes. Just following up on the inventory question, what was the price inflation between 2008 and 2009? And how much did you save basically?

The rough increase -- I'm going to give you a rough idea -- is about 5% increase, at the cost level obviously, would be the increase typically by the manufacturers on an annual basis.

Okay. And then also a follow-up on somebody else's question on the repeat orders sales, those are very strong. You're really saying that you haven't really changed your game a whole lot in how you are communicating with your customer and whatnot, they are just finding -- they're just coming back stronger and stronger. Is that kind of the tune?

Yes. We are communicating with them, we're staying in front of their face and giving the right promotions.

Very good. Thank you.

Ken Smith, Munder Capital.

Hi. My question was just on inventory, and it has been asked and answered. Thank you.

Nancy Hull, Ladenburg Thalmann.

Hi. Good morning. I just have two quick questions. One, have you seen any change in the frequency of customers taking advantage of your price matching policy in light of the difficult economic environment? Are customers kind of cluing into that more and taking advantage of that more than you've seen in prior quarters?

We have not seen any material change, no.

Okay. And then the second question is, you mentioned in response to an earlier question that you saw a shift of mix of the OTC versus prescription products. Could you just go into that a little bit more and kind of explain directionally where that -- was it OTC increasing or the prescription increasing? And is it enough to make you think that it might be the beginning of a bit of a trend of that shift continuing going forward, or is it something we should be mindful of?

The prescription sale increase was higher as a proportion to the total, and we would love that trend to continue. We're going to do our best.

So it is an indication I assume that of gaining additional share from the vets, and more (multiple speakers)

That is correct, and there is less competition of prescription medications.

Okay, great. Thanks. Really nice quarter.

(Operator Instructions) David [Senta], private investor.

Thank you for taking my call. Can you speak to the actual breakdown of prescription versus nonprescription, the percentages there? And my second question, and I know you don't comment on the stock price, but just the heavy volume of shorting in the stock and particularly whether the company has taken any actions to address that? I understand that as a company lists on an exchange, you can inquire as to whether your stock shorting is actually covered stock shorting or naked shorting.

As far as shorts are concerned, we are not aware of any naked shorting, but we could be wrong.

And what was your first question?

About just the percent. But on the shorting question, have you contacted the exchange and inquired about that?

Bruce?

Yes, we have talked to NASDAQ on that. And at this point it is -- the tagline is, as long as there is no naked shortings, which we have no indication that there is, it does cause for a more efficient market. And just what we concentrate as a businesses is concentrate on the fundamentals of the business, and in the long term it will take care of itself.

Right, right. But the actual percentage breakdown, prescription versus nonprescription?

For the last fiscal year prescription was 31% and the nonprescription was 69%.

Did that change markedly in the quarter, or no?

Yes, the prescription was higher, but I'm not going to get into specific percentages.

Thank you.

That was the final question. I would now like to turn the call back over to Bruce Rosenbloom.

Actually it is Mendo Akdag. But it's okay.

Just brief closing remarks. We will be focusing our efforts in three areas in fiscal 2010. 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.

That concludes today's conference. You may disconnect at this time.