Petmed Express Inc (PETS) 2009 Q2 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 second fiscal quarter ended on September 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 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 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, sir, you may begin.

Thank you, good morning. I'd 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 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'll review the highlights of our financial results; we'll compare our second fiscal quarter and six months ended on September 30, 2009 to last year's quarter and six months ended on September 30, 2008.

For the second fiscal quarter ended on September 30, 2009 sales were $62.4 million compared to sales of $59.6 million for the same period the prior year, an increase of 5%. For the six months ended on September 30, 2009 sales were $139.6 million compared to $127.9 million for the six months the prior year, an increase of 9%. The increase was due to increased reorders offset by decreased new orders for the quarter.

For the second fiscal quarter net income was $6.3 million or $0.28 diluted per share compared to $5.8 million or $0.25 diluted per share for the same quarter the prior year, an increase to earnings per share of 12%. For the six months net income was $14.3 million or $0.63 diluted per share compared to $12.4 million or $0.53 diluted per share a year ago, an increase to earnings per share of 20%.

Reorder sales increased by 11% to $45.8 million for the quarter compared to reorder sales of $41.4 million for the same quarter the prior year. For the six months reorder sales increased by 14% to $99.8 million compared to $87.6 million for the same period last year.

New order sales decreased by 8% to $16.7 million for the quarter compared to $18.2 million for the same period the prior year. The decrease was mainly due to a reduction in advertising spending. For the six months the new order sales were relatively flat at $39.8 million compared to $40.3 million for the same period last year.

We acquired approximately 233,000 new customers in our second fiscal quarter compared to 239,000 for the same period the prior year, and we acquired approximately 530,000 new customers in the six months compared to 506,000 for the same period a year ago.

Our average order was approximately $78 for the quarter compared to $81 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 environment. Approximately 67% of our sales were generated on our rep side for the quarter compared to 65% for the same period the prior year.

The seasonality in our business is due to the proportion of flea, tick and heartworm medication in our product mix. Spring and summer are considered peak seasons with fall and winter being the off-season.

For the second fiscal quarter our gross profit as a percent of sales was 37.9% compared to 38.4% for the same period a year ago. For the six months our gross profit as a percent of sales was again 37.9% compared to 38% for the six months a year ago. The percentage decrease for the quarter can be attributed to increases of product cost.

Our general and administrative expenses as a percent of sales were relatively flat at approximately 9.3% for the second fiscal quarter compared to 9.4% for the same quarter the prior year, and the G&A expenses as a percent of sales were 8.8% for the six months compared to 8.9% for the same six months the prior year.

For the quarter we spent $7.8 million in advertising compared to $8.7 million for the same quarter the prior year, a decrease of 10%. For the six months we spent $17.6 million in advertising compared to $18.7 million a year ago, a decrease of 6%. The decreases were due to a shortage in random TV advertising inventory.

Advertising cost of acquiring a customer for the quarter was $33 compared to $36 for the same quarter the prior year, and for the six months it was $33 compared to $37 for the same period a year ago.

Our working capital increased by $16.4 million to $71 million since March 31, 2009. The increase can mainly be attributed to cash flow generated from operations, a reduction of long-term auction rate securities investments.

We had $56.2 million in cash and temporary investments, $12.3 million in long-term auction rate securities investments, and $15.9 million in inventory with no debt as of September 30, 2009. Net cash from operations for the six months was $26.1 million compared to $18.7 million for the six months the prior year, an increase of 40%. The increase was mainly due to a decrease in inventory.

Capital expenditures for the six months were approximately $339,000. We declared our first quarterly dividend of $0.10 per common share during the quarter. This ends the financial review. Operator, we're ready to take questions.

(Operator Instructions). Mark Miller, William Blair.

Hi, good morning, Mendo and Bruce. Can you elaborate on the advertising market? It looks like the issue here is inability to get that remnant space. It's just physically not there for you or if you spent more could you obtain more? Because the Company has such high returns, it just seems like there would be an opportunity if you could -- obviously if you could get the message out even further.

Sure, good question. It's physically not there for us at the prices that we're willing to pay. And the issue is not 10%, so obviously we'll be willing to pay additional 10%. But physically it's not available at those prices. And the main reason for that is inventory is used by general advertisers buying in the scatter market instead of in advance. Typically large advertisers buy in advance but this year they did not. And they're buying in the scatter market and using the remnants of inventory that we used to get. So the market is not as orderly as it used to be.

So based on your experience and your contacts can you tell us how you think this evolves from here? Is this going to be a continuing state for PetMed do you think or do you see a change on the horizon?

We anticipate in 2010 that it will be more orderly. I think the large general advertisers will go back to buying in advance, is our anticipation.

Okay, my other question and I'll turn it over is can you give us an update on the fulfillment upgrade on the A-frame and how that's affecting your cost to fill?

The second phase is still not complete, the first phase is complete. We're anticipating the second phase will be complete by the end of December. We purposefully held it during our peak season to not cause any disruption. So we're going to start it back in about first week of November.

Thanks.

Mitch Bartlett, Craig-Hallum.

Great, thanks. Will you be pushing harder on other advertising channels other than the TV over the next six months or so while you wait for the remnant to come back?

We maximize the advertising that works for us, that we have tested pretty much all channels and all media that's available to us. And off-peak season I doubt it, I don't think that we will expand to any other media to make up the -- but first two weeks of October we were able to spend more money on TV so we'll see if that continues.

And any noise from price discounting from other retailers in the quarter? Did you witness any? Did people ask for price matching to a greater degree or anything like that?

The over-the-counter medications there are competitive, I would say highly competitive especially flea and tick categories, highly competitive. So, but I don't think it's any different than any -- from prior years. I think the consumer is more frugal and more price-sensitive this year and probably there's some medication noncompliance that appears to be impacting the market.

Some noncompliant medication?

Yes.

Medication from international sources or something like that?

No, no, no. I'm talking about the pet owner not complying with the medication.

Okay, okay.

For example, if it's once a month they're stretching it to once every other month, etc.

Got it. Thank you.

Anthony Lebiedzinski, Sidoti & Company.

Good morning. You had mentioned that your order size dropped a bit here as some consumers are switching from six packs to three packs. Now given that there are some signs of some saying that the recession is now gone, is over and there are signs of a recovery, would you anticipate that we'll see a return of consumers buying more of those six packs next year versus the three packs?

We certainly hope so; I guess the time will show.

Okay. And as far as the -- I know you guys don't give out the percentage of your sales specifically from flea and tick, but could you just say directionally the flea and tick medication as a percent of your sales, is it still the same as a year ago or has there been any changes on a year-over-year basis?

Yes, it is down and prescription sales are up.

Okay, and prescriptions generally are higher margin for you, right?

That is correct, yes. Not on the operating income level but on the gross profit level.

Got you. Okay, all right, thank you.

Kristine Koerber, JMP Securities.

Hi. A couple questions. First, you mentioned you expect the advertising environment to be a little more favorable for 2010 or more orderly. Why do you think that?

Due to the recession, general advertisers this year did not buy in advance and that causes less order in the market and they are coming in and buying in the scatter market and using up the remnant inventory.

Right, but why do you see that changing as we get into early 2010?

Well, if you look at all businesses, they're all suffering from the revenue part and everybody is working on getting their revenues up. So we are anticipating that buying in the scatter market was not favorable to them, they would have been better off buying in advance. So we're anticipating that they will go back to that. But I could be wrong.

Okay. And then the reorders -- a little lighter than first quarter. Was that primarily due to the downsizing by the consumers to smaller quantities?

Yes, the transaction size was down about 4%, so that's the main reason.

Okay. And then just lastly, the product cost, obviously it's been pressuring margin, is that a trend we should expect to continue?

Yes, I would anticipate that trend to continue and there should be some leverage on the operating expenses. But currently consumers are more frugal and more price-sensitive.

Thank you.

(Operator Instructions). Ed Woo, Wedbush.

Your payables went down a good amount this quarter. Was there anything special happening?

Just timing, nothing special.

But then on the G&A question, you mentioned that some of your (inaudible) change that you're doing, did that impact why SG&A went down? And should we see a similar seasonal pattern in SG&A through the rest of the year?

I would anticipate a similar pattern, we gained about 10 basis points on the G&A, so it wasn't too bad. But it's really not complete yet, our warehouse automation, so we're anticipating that will be complete by the end of December. So we'll see the impact in 2010.

Okay, thank you.

Mark Arnold, Piper Jaffray.

Good morning, a number of my questions have already been answered. But maybe just -- are you doing anything with your product mix to address the changes in purchasing behaviors, things like more smaller packs, any additional SKUs or any new products?

We always had the smaller packs, but we always pushed the consumer to buy -- up sell them to a higher pack. So we have not been successful this year as we did in the past. But we look at all the -- we're in the pet health business and we look at all the products that are available out there and we'll carry anything that there is demand for.

And you mentioned the impact of some of the (technical difficulty) behaviors changing last quarter as well. Are you seeing any evidence of customers reordering more frequently because they're purchasing those smaller packs? Are you seeing that yet or is that something we would expect to see in future quarters?

Not as much as we wanted to see and that's why September quarter reorder sales were a little soft. Obviously the average order size, the transaction size impacted that. We'll see, we hope so, yes.

Just one more question for me. Can you maybe just comment on -- given the fact that you don't purchase a lot of your products direct from manufacturers, what has happened to your product acquisition costs over the last few months or over the last few quarters as you've seen some of these purchasing behaviors change? We've obviously continued to see some weakness in the consumers' willingness or ability to spend in this area. Any comments on just your product acquisition costs and any changes you've observed there?

There's really no change from the prior year. We're probably buying a little bit better, but manufacturers still increase their list prices once a year, that has not changed. But the consumer is more price-sensitive currently.

And just a follow-up to that. Inventory levels or inventory available for purchase for you guys to get a hold of, does that remain in some of these products at higher levels, lower levels, how should we think about that?

The product is available.

Okay, thank you.

Mark Miller, William Blair.

A follow-up to that. I know in past years manufacturers had come in, and wholesalers, in July offering discounts. What did you see this year? I think you had drawn down inventories a little bit in advance of that. Did you see those favorable terms or was that less available?

There were some favorable terms, but we only take advantage of them if we think that favorable term is not going to be available in the near future. If we think it's going to be available in the near future it doesn't mean anything. We're not going to take advantage of it as much.

So following on with that is your expectation is you're going to see further discounts available from manufacturers?

We think so. But having said that we could be wrong, obviously. But we think so. So if you see an increase in our inventory that means we had buying opportunities that we don't think is going to be available in the near future. And if you don't that means we think it will.

Mendo, I just wanted to follow-up on your comment about the consumer being more frugal; you mentioned that a couple times. Gross margin is coming down, although you expect operating cost to come down. On the bottom line I think your view in the past has been that this could net out still for the Company to still increase operating margins. Is that dynamic still in place or are you -- when we roll it together with a more frugal customer does it make it harder now for you to get operating margin expansion?

It will be more difficult to expand operating margin in the current environment. But 2010 is another year.

Okay.

Ross Taylor, C.L. King.

Just two or three quick questions. You mentioned the three pack versus six pack ordering and you saw some of that back in your June quarter as well. But do you think there's any chance you'll see some catch-up in your business because people are ordering less, or do you think customers are really just finding that they can get by with less so we're not going to see any catch-up in the future?

My gut feeling is that they're going to get by with less, but I could be wrong. We always attempt to obviously get the next order; we keep track of their inventory and contact them when we think they're running out. But having said that, we're getting into now our off-peak season.

Okay. And second question, your reorder growth rate jumps around a bit on a quarterly basis. Do you think there's any correlation there with how much you're able to spend on advertising and marketing or are they just totally independent?

There probably is a correlation, but it's difficult to pinpoint the correlation. You can pinpoint a direct correlation with advertising spending and new orders. But there is -- I can't say there's a direct correlation with advertising spending and re-orders. But I'm sure it helps. But it's very difficult to pinpoint.

Okay, that's all I had. Thanks very much.

Thank you. And I will turn the call back over to Mendo Akdag. Thank you, sir.

Thank you. We will continue 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 operational efficiency and current service level. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call.

Thank you. We thank you for your participation today and you may all disconnect.