Petmed Express Inc (PETS) 2010 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, 2010. At the request of the Company, this conference 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. I'd 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 current 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.

Thank you, Bruce. Welcome, everybody. 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, 2010, to last year's quarter ended on June 30, 2009.

For the first fiscal quarter ended on June 30, 2010, our sales were $74.4 million, compared to sales of $77.2 million for the same period the prior year, a decrease of 3.6%. The decrease was due to decreased new orders, offset by increased reorders.

For the first fiscal quarter, net income was $7.2 million, or $0.32 diluted per share, compared to $8.1 million or $0.36 diluted per share for the same quarter last year, a decrease to earnings per share of 11%.

The decrease was due to lower sales, a decrease in gross profit margins as a result of more aggressive sales promotions, and a one-time tax charge.

Reorder sales increased by 7% to $57.6 million for the quarter compared to reorder sales of $54 million for the same quarter the prior year.

New order sales decreased by 28% to $16.8 million for the quarter compared to $23.2 million for the same quarter the prior year. The decrease was due to lower advertising spending and increases in customer acquisition costs.

We acquired approximately 220,000 new customers in our first fiscal quarter compared to 297,000 for the same period the prior year.

Our average order was approximately $82 for the quarter compared to $84 for the same quarter the prior year. The decline was due to more aggressive sales promotions.

Our online sales increased by 1% to $52.3 million for the quarter compared to $51.8 million for the prior quarter. And approximately 70% of our sales were generated on our website for the quarter compared to 67% 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-season.

For the first fiscal quarter, our gross profit as a percent of sales was 36.6% compared to 38% for the same period a year ago. The percentage decrease can be attributed to more aggressive sales promotions and increased product costs.

Our general and administrative expenses as a percent of sales were 8.3% for the first fiscal quarter compared to 8.4% for the same quarter the prior year. The improvement shows leverage of the G&A.

We spent $8.8 million in advertising for the quarter compared to $9.9 million for the same quarter the prior year, a decrease of about 10%. The decrease was due to lack of [random] TV advertising availability at affordable prices during the quarter. This resulted in an increase in the advertising costs of acquiring a customer, $40 for the quarter compared to $33 for the same quarter the prior year.

Our working capital increased $6 million to $85.4 million since March 31, 2010. The increase can mainly be attributed to cash flow generated from operations.

We had $66.9 million in cash and cash equivalents, $10 million in short-term investments, $12.4 million in long-term auction-rate securities investments and $15.8 million in inventory with no debt as of June 30, 2010.

Net cash from operations for the quarter was $26.5 million, and capital expenditures for the quarter were approximately $130,000.

In accordance with our share repurchase program, we repurchased approximately 38,000 shares, paying approximately $670,000 during the quarter.

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

(Operator Instructions). Mitch Bartlett, Craig-Hallum.

Could you break down how you distributed your advertising against the different channels that you use?

No, I'm not going to do that. We spent a little bit more on our line-ad print, but I'm not going to give you specific numbers.

Is TV still the majority? I think you've said that in the past.

Close to it, yes, yes. Keep in mind that historically, our marketing approach has been multi-channel, TV online and print. But, TV has been the predominant advertising method, and the channels complement each other, and it's difficult to shift dollars in a cost-effective manner.

Does that mean that there will be no change going forward or --?

It will cost us more. We were not as efficient, as you can see from the numbers. We paid more per impression. And that's the reason we got the results we got on.

No, I mean, by your statement, are you going to stick with basically the same kind of percentages allocated?

The tests, yes. The tests -- and we have done some tests during the quarter and they are showing, indicating, that we will likely stick to the same mix that we had in the past.

Thank you very much.

Anthony Lebiedzinski, Sidoti.

Good morning. The gross margin pressure that you saw in the quarter over here, you had mentioned that was promotions and product costs. Can you give us a little bit of a flavor as to how much? Was it driven by product costs increasing, and how much was it you guys increasing discounting on products?

Probably my guess would be about 70/30; 70% is due to more aggressive sales promotions and the 30% due to product cost increases.

Do you think this is the result of Bayer opening up their channel of distribution? Or is it other factors as well?

I think the economy is playing a role. Consumers are giving greater consideration to price, stretching the usual, the preventatives and switching to lower-priced brands. So I think the softer economy has been catching up with us.

As far as your mix of products between prescription and nonprescription, has that materially changed?

Prescription, yes. We are selling more prescription, and the prescription has been positive and over-the-counter has been negative growth.

Okay. So as far as the advertising strategy, you expect that to largely remain the same or what's the plan here to try to get new order of sales in the right direction?

The channels complement each other, so it's difficult to just put the money in all line and print. It's just not as efficient, so we will likely stick to what we got is what the data is showing. Really data directs us.

But --

The opportunities on reorders, we think we can get more sales from our existing customer database.

Okay, thank you.

Kristine Koerber, JMP Securities.

Can you talk about any changes that you may be seeing in the competitive environment that's impacting the reorder growth?

There are more players than on the over-the-counter meds, so it's the over-the-counter med competition is getting crowded, so it puts price pressures on us. But, really, the trends we are seeing are the consumer is stretching the medication usage, and switching to lower-priced brands -- has impacted reorders. Also, reduction in the advertising might have negatively impacted reorders.

So how are you going to go about stimulating reorder growth then?

More sales promotions, expanding our product offerings, and guiding the consumer to the right products.

Okay. And then in terms of the remnant space, what are you seeing as far as costs? I know in the past you had indicated that some of the general advertises have been driving up costs as they buy up the remnant space.

It was tight during the quarter. We paid more per impression. So, we are anticipating that to continue until the fourth quarter.

How much more did you pay per impression?

Quite a bit; probably 15%, 20% range, roughly, to give you a rough idea.

Okay. Great, thank you.

Michael Kupinski, Noble Financial.

Thank you. I know that most of my questions have been answered, but I was wondering, there has been, obviously, some concern over a double-dip recession, and at least for now it didn't sound like there has been any advertising cancellations in cable networks and so forth. And I was just wondering, are you hearing that maybe the remnant space is kind of freeing up a little bit, given concern over the prospect of a recession or maybe much slower growth?

It's freed up a little bit the beginning of July, but we are anticipating that it will get crowded again this quarter. General advertisers typically buy in advance 80% of their buying, and roughly 20% they buy in the scatter market historically. But the last year or so, they've been buying 60% in advance and 40% in the scatter market, and that's why the remnant space is getting crowded. The stations are telling us that that's going to change in the fourth quarter, and we'll see how what happens.

And in terms of the accessories, were there any revenues that generated from the accessories that you kind of started -- I guess testing that in the last quarter? Anything that you can share with us (multiple speakers)?

Nothing material. It was a little over $90,000 for the quarter.

And in terms of the margins on the accessories, is there a way that you can see any improvement there? I know that you said that the margins are probably going to be lower than your general margins, but --

They will be by -- I would say 25%, 30% range. I think I said 30% the last time, is what I would anticipate going forward.

And have you made any decisions in terms of the types of accessories that you might be offering or in terms of the number of SKUs that you might be offering going forward?

Yes, we are researching them. I'm not going to disclose it right now, but we are researching to bring really the best products for the consumer and guide the consumer, really, to the right products, is our approach to get more revenue from our customer database.

Okay. Thank you.

Edward Woo, Wedbush Securities.

Yes, I had a question about availability of products. Have you noticed any change in availability, particularly with some of your OTC products?

It was the availability on one of the brands. We're a little tighter than usual this year. And that's probably due to more players entering the market.

And do you see any differences in regions of the country, or in terms of availability of products within regions?

I'm not going to comment on that as far as that gets into how we buy. And due to competitive reasons, I'm not going to comment on that.

Okay, thank you.

Mark Arnold, Piper Jaffray.

Good morning. I guess I wanted to get into talking a little bit about -- well, the OTC business, it sounds like it's going to be under pressure for a while here, both economic and competitive. But can you talk a little bit more about the prescription business? What can you guys do more specifically with your advertising to drive the prescription business?

Just advertise it more or communicate it more, so, which we're doing.

But nothing more specifically there about using your customer database? What -- I guess that seems to be an area that you guys have the ability to maybe differentiate over some of the array of providers.

Sure; you're correct. I mean I'm not going to get into any specifics because there are a couple dozen copycats that copies us, so it's --.

Okay. Then just as it relates to your cash balance and your share repurchase activity, you guys continue to -- even with the weak results here in the quarter, your cash flows were really strong. Your cash balance has grown quite significantly. How should we look at share repurchase activity and kind of your plans for all that cash on your balance sheet?

We still have, I think, a little over $9 million left on our share repurchase plan. And as you know, we're paying dividends. So expect cash to be used for dividends and the share repurchase plan.

All right; thank you.

[Eric Wallenia], William Blair.

Good morning, gentlemen. My first question is just a housekeeping item. Bruce, Mendo had mentioned a tax impact in the P&L this quarter. Could you give some color?

Right. Our tax provision was 39.3% for the quarter compared to 36.2 for the same quarter last year. The percentage increase can be attributed to a one-time tax charge of approximately $280,000 as a result of a net operating loss carry forward reconcilement during the quarter. So our estimated rate for fiscal 2011 is still at that 37% range.

So, nothing's really unchanged from the guidance we gave back during -- disclosed in the 10-K, but this was a one-time charge. We do not expect anything -- any other types of charges going forward, except for normal tax temporary and permanent differences.

Got it; thanks for that.

My next question is related to the Bayer products that you guys have been purchasing directly. We've noticed recently that when you go to your website, and you put in a competing, a competitor -- a non-Bayer product into your cart, then you go to check out, I see that you guys have added a screen where it prompts a customer to possibly save $X if they switch from the non-Bayer product to the Bayer product. And I just want to get a sense from you guys how successful that has been so far and what kind of financial impact that has.

Obviously, I would think if you are prompting the customer to shift from a high-priced non-Bayer product to a lower-priced Bayer product, you are -- there's going to be a negative revenue impact to your P&L, but I would think there's a positive offset on the gross profit line. Could you talk a little bit about that, and how but how successful that initiative has been so far?

You are correct; there is a positive impact on the gross profit line. Although, it hurts a little bit, your top line.

As far as success, if you see us continuing it, that means it's successful. If you don't, that means it's not. So I'm going to leave it at that.

How long do you think you would have to let it -- the initiative work in place before you know if it's a success or not -- a time line?

Yes; we'll likely continue it. How's that?

Okay. Next question is related to the customer acquisition costs. Obviously, it jumped up quite a bit this quarter. How high would you be willing to go? You've historically been in the mid-30s. I believe this quarter was $40. How high is too high?

We have thresholds and we watch that. Obviously, the average -- you're seeing the average, which was $40. You are not seeing the range, so I think probably the better way for me to explain it is what is the incremental cost of an additional customer? And that number is much higher than $40.

Okay. And I'm assuming that's been creeping up the last couple quarters. Are you anticipating that to continue creeping up?

We're paying more per impression, so that's one of the reasons obviously it's higher. We were not as efficient, which we had less TV exposure. So those play a role. So in the short term it could, but in the long run, it averages itself out.

Okay. My final question is related to purchasing. It looked like the quarter-end inventory was down slightly year over year. Can you maybe just comment a little bit about the ability to purchase? Your inventory being down year over year, is that more reflective of a conservative outlook in terms of the sales trend? Or are you just not seeing attractive purchasing opportunities in the marketplace?

The second one. There was no attractive buying opportunities in the marketplace. That's why the inventory is what it was.

Okay. Thank you very much.

Ross Taylor, CL King.

Hi; most of my questions have been answered, but maybe two or three left.

I guess for the quarter, how much impact from competition did you see from some of the traditional retailers, like PetSmart getting more into this business versus some of the online retailers? Can you quantify that at all?

It's very difficult. Unfortunately I cannot. I'm sure there's some impact. But we are -- the trend is consumers giving greater concentration to price, and also, using less, stretching the usual, the preventative, especially the OTC medications. And also shifting to lower-priced brands is -- we think is impacting the whole market, not just us.

Okay. And related to that, I guess, do you see the pricing or promotional environment getting any better in the near term? Or do you think it's going to stay the way it has been?

In the short run, I think it will stay the way it is, but it's probably the reflection of the economy. And consumers are expecting more sales promotions, or requiring, I should say.

Okay. And last question, I missed the number of shares you repurchased in the quarter or the dollar amount. I wonder if you could repeat that, please.

Sure. 38,000 shares were purchased at about $670,000.

Okay, all right, good. Thanks very much.

(Operator Instructions). Mitch Bartlett, Craig-Hallum.

I wonder if you could kind of inform us on how important flea and tick -- a healthy flea and tick business is to driving healthy prescription sales. Do they stand alone? Are they intermixed? Is it important to have healthy flea and tick to drive prescription?

I don't think so; I don't think it's required. But, it's historically been easier to acquire a customer to -- for -- with the flea and tick preventative, but it's not required.

Okay. And then maybe an update on generics in the flea and tick category? Will you know?

The patent is expiring in August, so in a month. And I'm pretty sure we will see some generics for Frontline Top Spot, which is the prior generation. It's not a Frontline Plus, but you will see some generics for Frontline Top Spot in the market soon.

Will you be carrying those?

Likely, yes.

And at what kind of price discount does that come at?

Don't know yet, so we will see how the market treats it.

Great, thank you.

There will be some, obviously, discount from the brand.

Thank you. This does conclude the question-and-answer session. I would now like to turn the call back over to Mr. Mendo Akdag. Thank you, sir.

Thank you. Our focus in fiscal 2011 is one, conversion optimization, and two, expanding our product offerings to pet supplies. This wraps up today's conference call.

Thank you for joining us. Wendy, this ends the conference call.

Thank you for participating. You may now disconnect.