Petmed Express Inc (PETS) 2009 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 fourth fiscal quarter and year ended on March 31, 2010. 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 prescriptions and nonprescription pet medications and other health products for dogs, cats and horses direct to the consumer. 1-800-PetMeds markets its product 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 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 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 upon 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 risk, 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 on 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-PetMeds.

Thank you, Bruce. Welcome and 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, 2010 to last year's quarter and fiscal year ended on March 31, 2009.

For the fourth fiscal quarter ended on March 31, 2010, sales were $50.3 million compared to sales of $48.1 million for the same period the prior year, an increase of 5%. For the fiscal year ended on March 31, 2010, sales were $238.3 million compared to $219.4 million for the prior fiscal year, an increase of 9%. The increase was due to increased reorders offset by decreased new orders.

For the fourth fiscal quarter, net income was $6.1 million, or $0.27 diluted per share compared to $5.6 million, or $0.25 diluted per share for the same quarter of the prior year, an increase to earnings per share of 9%.

For the fiscal year, net income was $26 million, or $1.14 diluted per share, compared to $23 million, or $0.98 diluted per share a year ago, an increase to earnings per share of 17%. Reorder sales increased by 9% to $40.4 million for the quarter compared to reorder sales of $37.2 million for the same quarter the prior year.

For the fiscal year, the reorder sales increased by 13% to $177.8 million compared to $156.9 million for the prior year. New order sales decreased by 8% to $9.9 million for the quarter compared to $10.8 million for the same period the prior year. For the fiscal year, the new order sales decreased by 3% to $60.5 million compared to $62.5 million for the prior year. The decreases were due to lower average order size and less spending on advertising. Average new order size was down 3% for the quarter and 5% for the fiscal year.

We acquired approximately 134,000 new customers in our fourth fiscal quarter compared to 142,000 for the same period the prior year. And we acquired approximately 815,000 new customers in the fiscal year compared to 802,000 for the prior year.

Our average order was approximately $81 for the quarter compared to $82 for the same quarter the prior year. And it was $80 for the fiscal year compared to $82 for the prior fiscal year. Approximately 70% of our sales were generated on our website for the quarter compared to 66% for the same period the prior year. And for the year, it was 68% compared to 65% for 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-season.

For the fourth fiscal quarter, our gross profit as a percent of sales was 39.9% compared to 40.3% for the same period a year ago. For the fiscal year, our gross profit as a percent of sales was 38.6% compared to 38.9% for the prior year. The percentage decrease can be attributed to increases in product costs.

Our general and administrative expenses as a percent of sales were 10.2% for the quarter compared to 10.7% for the same quarter of the prior year. And for the fiscal year, the G&A was 9.4% compared to 9.8% for the prior year. The improvement shows the leverage of the G&A.

For the quarter, we spent $4.9 million for advertising compared to $5.1 million for the same quarter of the prior year. For the fiscal year, we spent $27.7 million for advertising compared to $28.7 million for the prior fiscal year, a decrease of about 4%. The decreases were due to shortage in remnant ad inventory availability on television.

Advertising costs of acquiring a customer for the quarter was approximately $36, which was the same as it was for the same quarter the prior year and for the fiscal year, it was $34 compared to $36 for the same period a year ago.

Our working capital increased by $24.8 million to $79.4 million since March 31, 2009. The increase can mainly be attributed to cash flow generated from operations. We had $53.1 million in cash and temporary investments, $12.4 million in long-term auction rate securities investments and $29.1 million in inventory with no debt as of March 31, 2010.

Net cash from operations for the fiscal year was $27.7 million compared to net cash from operations of $15 million for the prior fiscal year. Capital expenditures for the fiscal year were approximately $700,000. This ends the financial review. Operator, we are ready to take questions.

(Operator Instructions). Mark Miller. Your line is open, sir and please state your company name.

It's Mark Miller with William Blair. Good morning, Mendo and Bruce. Could you elaborate on your two priorities you have highlighted in the press release -- conversion optimization and expansion of the product offering into pet supplies? I guess on the first point, what was the trend in the conversion rate? I guess for the full year, you disclosed it after the fourth quarter, but it does appear to have improved in the March period. Was that the case and I guess what are your specific initiatives to increase the optimization first of all?

Sure. The Internet website conversion was up about 65 basis points for the quarter and actually it was up 140 basis points for the year. What we are working on is website conversion -- e-mails, search engines, banners, prints, etc. So we do AV testing to attempt to improve them.

As far as expanding our product offerings, we just started that about a month or two ago. We started with more focus on health, safety and wellness with steps, ramps, strollers, crates, beds, etc. and we will continue expanding on it.

I think one of the things you were testing was your success with fulfillment and customer satisfaction of that. Can you give us an update on how that is going?

Did you say fulfillment?

Well just the service as you're working with partners on some of these products, how --.

The third-party fulfillment. Yes, so far, it is going well, but it has only been 30 days. It is really too soon to tell, but so far, it is going fine. We have not been disappointed.

Okay. One other question and then I'll get back in line. What percent of your flea, tick and heartworm meds are you able to buy direct at this point or do you expect to be buying direct in fiscal '11? And then what portion of those savings might, do you think, be invested in lower prices versus potentially shoring up the gross margin? Thanks.

I am not going to give you a specific number, but the only payer is the only one really so far we are buying direct. And we will be -- we are buying under more favorable terms than we did in the past.

Mark Arnold.

Good morning, guys. Just a follow-up on the conversation about the expansion, the expanded product offerings. So you kind of talked about what you have done to date. Can you give us a sense as to what other types of supplies you would consider adding going forward here? Are they going to be similar to the ones that you mentioned?

No, we will add additional categories, but I am not going to get into the details due to the competitive nature of the information.

But what will this do to your gross margins as we look out to fiscal 2011?

In the long run, it will reduce. It has less gross margins, but right now, it is not a material portion of our business. But in the long run, it could become material and it typically will have less margins, gross margins than the PetMeds.

Okay. The second area I wanted to talk about, has the Company sought that [Vip] certification and if yes, has the Company obtained that certification?

Yes, we have obtained Web certification. We are Web-certified.

Does that provide you any opportunities or competitive advantages here in the coming months?

It does in the short run with search engines, but it will -- everybody was probably going to end up getting it in the long run, so I wouldn't read too much into it.

And then how should we think about your prescription business? I mean you are talking about expanding the product offerings on the pet supply side. But how should we think about your plans or how you are thinking about growing your prescription side of the business?

Advertise, more aggressively advertise the prescription business. That is how we will get more business. And last fiscal year, it has grown much faster than the OTC business.

Lastly, can you just give us an update on how you guys are seeing the ad market and how it is playing out for you guys as we look into the next coming quarters?

It is challenging. Unfortunately, the scatter market is very strong with demand from general advertisers. So there is still shortage in remnant space. So far, it has been challenging.

Thank you.

Anthony Lebiedzinski.

Yes, good morning. I am from Sidoti & Co. Just a couple of questions over here. Just could you talk about the -- the reorder sales certainly were up again. New order sales slipped over here. Is this just a function of you guys seeing still a challenging remnant market or is there anything else that you think is causing the new order sales slipping?

Two reasons really. One was the challenging remnant space market and two, average order size was lower for the quarter, about 3% lower, average new order size. And it was actually down 5% for the year.

Are you still seeing customers ordering in smaller packs like you saw last year?

Slightly. It is getting better. For the quarter, average order, overall average order size was $81 compared to $82 last year. So reorders were flat basically and new orders were down about 3%.

Right. Now as far as the move into pet supplies, are you guys taking inventory of any of those products or is everything being drop-shipped from another third party?

Drop-shipped from third party.

Okay. And does a sale of third-party product or a third-party drop-ship, does that flow through your income statement or how does that work?

Yes, we recognize the sale.

Okay. All right. Thanks. That's all I had.

Kristine Koerber.

Yes, hi. Can you just give us a little more color on some of the new products on the pet supply that you will be offering? I mean number of SKUs and you said the margin, gross margin would be lower, but can you kind of give us some idea how much lower?

Currently, we added, and you can go to our website, by the way, and look under Supplies category and see what we are carrying so far and if you are a pet owner, buy something. We added crates, steps, ramps, strollers, beds is so far what we did. But I am not going to get into specifically what else. We are going to pretty much test everything. It depends on really a category -- I mean what -- the items that I mentioned is probably about 30% margin is what you are looking at just to give you a rough idea.

Okay, that's helpful. And then are you hearing anything from other manufacturers as far as possibly going direct at some point?

Unfortunately, all of our communications are confidential, so I can't really say anything about it.

But currently with the Bayer you have begun buying product directly from them?

Yes.

Okay, thank you.

Edward Woo.

Wedbush Securities. Was there any change in product mix between prescription/nonprescription in the quarter?

Yes, more prescription business and for the year, I will give you the year number, 35% of the business was prescription compared to last year, it was 31%.

Good. The other question I have, have you noticed any change in competitive marketplace during the quarter?

Not really. I mean it has been competitive. The only thing I can tell you is that consumer is becoming more aware of the alternative channels that are available.

Okay, thank you.

Mitch Bartlett.

Craig-Hallum. I am wondering if you could kind of expand on the last question. Flea and tick sales in the fourth quarter, how did they do percentagewise?

I am not going to give you a specific number, but I can tell you that it was flat. And overall market was flat to down a few percent.

So year-over-year flea and tick was flat in the fourth quarter. Okay, so --.

Colder weather might have adversely impacted it. The flea season started late this year.

You have had three quarters of negative new customer sales. Do you think the slowdown in the core reorder sales has something to do with kind of that sluggishness that you are seeing in the new customer side?

It's possible. Colder -- as I mentioned, colder weather might have adversely impacted it. Also, in general, the overall markets, we are seeing that, over the counter, was pretty much flat to down a few percent. Consumers giving a greater consideration to price and probably the medication noncompliance and switching to lower-priced brands appears to be adversely impacting the market.

Does it make you rethink kind of the mix on your advertising strategy? I mean you are continuing to talk about a tough scatter market going (multiple speakers).

We are attempting to shift some dollars to online trends and maybe even spend more money on our existing customer database, reactivate ex-customers basically.

So the level of advertising investment as we look into the first half of next year, how does that look year-over-year?

As I mentioned, it is challenging. It has only been a month, so we will see how it progresses, but it has been challenging.

I meant more as a philosophy of how you might be attacking the market. Will you be spending more, whether it is a scatter market or not, on acquiring new customers in the first half of next year?

We will attempt that, but the remnant space on television has been challenging. So we may not be able to do what we are attempting to do basically.

And you won't make that up in the online advertising or other channels?

We will attempt that and we will attempt to make it happen in other channels.

Very good.

But there are a lot of tactical decisions based on data that comes in the picture. So it is difficult for me to exactly point out how it is going to shape up.

So that may be an ROI on the different channels and there being a difference or why would you not move more towards the online if it's a scatter market? Is there a different kind of return associated with those markets?

Well, you always have to look at the incremental cost of acquiring an additional customer and that is much higher than our average that we give to you guys.

(technical difficulty) in other channel (technical difficulty) trying to ask. If you were to push more money toward other channels, is that incremental cost going up or not?

It is.

Thank you very much.

(Operator Instructions). Ross Taylor.

Hi, it's Ross Taylor, CL King. I have three or four questions. Can you give a little bit more color on some of the factors that are driving the lower average order size in the quarter?

What we are seeing is medication noncompliance, which means, for example, if the medication is supposed to be given once a month, the consumer is stretching it and using it once every other month or every 45 days. And we are also noticing some switching to lower-priced brands.

Okay. And you mentioned changes in your product mix, prescription versus OTC. Is that more due to changes in prices within each category or is it driven by unit changes in each category?

We have been more aggressive marketing prescription medications and we think there is an opportunity in prescriptions. There is much less competition and it looks like it is working.

Okay. Two other questions. I am curious as to how you are going about promoting the pet supplies that you are taking on in your business. I mean how are you marketing those? Do you anticipate TV advertising as well? And you also mentioned in response to one of the recent questions, you might try to work with your existing database of customers more to give some of the inactive customers incentive to buy. I mean what types of things could you do to get some of the inactive customers to come back?

Give them discounts, promotions basically to reactivate existing customers, I mean ex-customers, not existing, ex-customers. And as far as pet supplies are concerned, we haven't really advertised yet. We just put a list of them on our website. But we will and we will test different things and we will see -- it has only really been 45 days since we put them up. So we want to get some comfort with the suppliers, make sure there is no customer satisfaction issues. And once we do that, we have more supplies, we will test different advertising to see how it works.

Okay, that's helpful. Thanks very much.

Anthony Lebiedzinski.

Sidoti & Co. Just can you talk about what your CapEx plans are for fiscal '11?

It should be less than $1 million, so it is going to be mid to high six figures is what I would expect. We are in a maintenance mode at this time.

And I know there was a little bit of a calendar shift I guess in the quarter because you had technically five Mondays in March. Was that anything significant sort of for your quarter because I know for you, typically Monday tends to be your highest volume kind of day?

To be honest with you, I have not paid attention to that. In the long run, it balances it out.

Okay, sounds good. Thanks.

That does conclude today's Q&A session.

Thank you. [We are] closing our focus in fiscal 2011 as one, conversion optimization and two, expanding our product offerings to pet supplies. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call.

That does conclude today's conference. Thank you all for participating. You may disconnect at this time.