Petmed Express Inc (PETS) 2010 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 quarter and fiscal year ended on March 31, 2011. 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 non-prescription 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 customers 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 turn the call over to your Company's Chief Financial Officer, Mr. Bruce Rosenbloom.

Thank you. I would 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, President and Chief Executive Officer of 1-800-PetMeds. Mendo?

Thank you, Bruce. Welcome everyone today. We will review the highlights of our financial results, we will compare our fourth fiscal quarter and fiscal year ended on March 31, 2011 to last year's quarter and fiscal year ended on March 31, 2010. For the fourth fiscal quarter ended on March 31, 2011, our sales were $50.9 million, compared to sales of $50.3 million for the same period the prior year -- an increase of 1.2%. For the fiscal year ended on March 31, 2011, sales were $231.6 million, compared to $238.3 million for the prior fiscal year -- a decrease of 2.8%. The decrease for the year was due to a decrease in new order sales, offset by an increase in reorders.

For the fourth fiscal quarter, net income was $4.1 million, or $0.19 diluted per share; compared to $6.1 million, or $0.27 diluted per share, for the same quarter of the prior year -- a decrease to earnings per share of 30%. For the fiscal year, net income was $20.9 million, or $0.92 diluted per share; compared to $26 million, or $1.14 diluted per share, a year ago -- a decrease to earnings per share of 19%. The decreases were primarily due to a reduction in gross profit margins and lower sales for the fiscal year. Reorder sales increased by 2.7% to $41.5 million for the quarter, compared to reorder sales of $40.4 million for the same quarter the prior year. For the fiscal year, reorder sales increased by 3.7% to $184.3 million, compared to $177.8 million for the prior year.

New order sales decreased by 5% to $9.4 million for the quarter, compared to $9.9 million for the same period the prior year. For the fiscal year, new order sales decreased by 22% to $47.3 million, compared to $60.5 million for the prior year. The decreases were due to increases in customer acquisition costs. We acquired approximately 130,000 new customers in our fourth fiscal quarter, compared to 134,000 for the same period the prior year. And we acquired approximately 645,000 new customers in the fiscal year, compared to [815,000] for the prior year.

Our average order was approximately $78 for the quarter, compared to $81 for the same quarter the prior year; and it was $79 for the fiscal year, compared to $80 for the prior fiscal year. Approximately 73% of our sales were generated on our website for the quarter, compared to 70% for the same period the prior year; and for the year, it was 71% compared to 68% 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 season, with fall and winter being the off season.

For the fourth fiscal quarter, our gross profit as a percent of sales was 34%, compared to 39.9% for the same period a year ago. For the fiscal year, our gross profit as a percent of sales was 36.2%, compared to 38.6% for the prior year. The percentage decreases can be attributed to more aggressive pricing and increases in product cost. Our general and administrative expenses as a percent of sales were 10.2% for the quarter, which was the same as it was for the same quarter the prior year. And for the fiscal year, the G&A was 9.6%, compared to 9.4% for the prior year. The increase for the year was primarily due to lower sales.

For the quarter, we increased our advertising spending to $5.5 million, compared to $4.9 million for the same quarter the prior year. For the fiscal year, we spent $27.4 million for advertising, compared to $27.7 million for the prior fiscal year. Advertising cost of acquiring a customer for the quarter was approximately $42, compared to $36 for the same quarter the prior year. And for the fiscal year, it was also $42, compared to $34 for the prior year. The increases were due to reduction in response rates, due to increased competition and softer demand, and increase in advertising cost for the fiscal year.

Our working capital increased by $1.2 million to $80.6 million since March 31, 2010. The increase can mainly be attributed to cash flow generated from operations, offset by dividends paid and stock repurchases. We had $59.8 million in cash and temporary investments, $12.4 million in long-term auction-rate securities investments, and $25.1 million in inventory, with no debt as of March 31, 2011. Net cash from operations for the fiscal year was $30.1 million, compared to net cash from operations of $27.7 million for the prior fiscal year.

Capital expenditures for the fiscal year were approximately $667,000. In accordance with our share repurchase program, we repurchased approximately 465,000 shares, paying approximately $7 million during the quarter. And we repurchased approximately 791,000 shares, paying approximately $12.2 million in the fiscal year. This ends the financial review. Caroline, we are ready to take questions.

Thank you. (Operator Instructions) And our first question or comment comes from Mitch Bartlett from Craig-Hallum. Your line is open.

Yes. Just wondering what the advertising strategy might be for the next fiscal year? Do you plan to step up advertising significantly? And what would you anticipate, at least near-term, the advertising market to be, as far as the ability to acquire customers?

We plan on [planning] more money than we did last year in advertising. General advertisers moved back to up from buying on television. Currently, the scatter market eased up.

Has eased up?

Yes.

So, if you're planning to spend more next year, are you planning to spend more in the first fiscal quarter? And to what -- ?

We will, yes, and also during the year, we are planning on spending more money than we did last year.

Can you help us in understanding how much more, or to what degree you're going to go after customers?

I am not going to get into that, but I can say that we are going to be aggressive.

But we should think about at least a more stepped-up, more significant, plus 20% kind of advertising, beginning in the current quarter?

Well, I am not going to get into the percentages, but all I can tell you is, we are going to be aggressive.

And -- okay. Good enough. Thank you.

Thank you. Our next question or comment comes from Kevin Ellich from Piper Jaffray. Your line is open.

Hi. I just had a couple of questions. Could you talk a little bit about, I guess, overall pricing trends? And given the price decline that we saw this quarter, is that what we should expect going forward? Or are you going to be aggressive on the pricing strategy as well?

Yes. We implemented a more aggressive pricing strategy, and we need to be competitive. So, that's what the market forces are requiring us to do.

Got it. Okay. And then, just wondering, given the seasonality in the business, have you -- could you talk maybe a little bit about what you're seeing on the flea and tick sales over the last month, month and a half? Are we seeing any sort of increase, given the seasonality?

We saw, obviously, an increase in April. But the weather was cold, so we will see how it goes in May and June.

So, maybe a little lag effect, given the slower pickup in warm weather?

Correct.

Okay. Got it. And then, just lastly, given the gross margin pressure, just wondering what you can do to kind of mitigate that impact. And given the economic backdrop, what strategies have you guys laid out? Could you talk a little bit to that?

More generics and private brand is our strategy, but it's going to take a while to get there.

Okay. Sounds good. Thank you.

You're welcome.

Thank you. Our next question or comment comes from Anthony Lebiedzinski from Sidoti. Your line is open.

Good morning. Just a follow-up on the last question, please. The generics and private brand, what percent of your current sales is that now? And potentially, where could you see that going?

At the moment, it's single digits. I'm not going to give you a specific number, but we will work on it. And since there are some generics for top brands now, that should increase going forward.

Okay. And the 34.3% gross margin that we saw in this quarter over here, is that a run rate that we should expect going forward? Or, if not, then what would be the reasons for that to change?

All I can tell you is, expect continuing pressure on gross profit margins. But I'm not going to give you a specific number at this time.

Okay. And, just curious, are you seeing more people nowadays ordering from their smartphones through your -- through mobile shopping? Is that a trend you expect to continue?

Yes, I do. It is increasing, and we expect that it will continue to increase.

Okay, thanks.

You're welcome.

Thank you. Our next question or comment comes from Edward Woo from Wedbush Securities. Your line is open.

Yes, you know, you mentioned that you are going to advertise more and be more aggressive on pricing. Your revenue growth grew this quarter. Do you feel that you are at a point where you are aggressive enough on both advertising and on pricing?

Obviously, the reason that we are more aggressive in pricing and we are increasing our advertising is to grow the top line. So, at this time I can tell you that we are top-line focused.

Okay. And then, the other question is, this entry into, I guess, more of a pet accessories -- how is that going?

It's increasing. It's increasing. So, in the long run, it's going to help us. But, at this time, it's not material.

Okay. Thank you and good luck.

Thank you.

Thank you. (Operator Instructions) Our next question or comment comes from Ross Taylor from CL King. Your line is open.

Hi. Just had two questions. First, on the gross profit margin, I just wanted to double-check that there weren't any other items, like packaging or freight, that were putting any material pressure on that line.

Not last fiscal year, no. The freight is about the same, as a percent of sales, as it was the prior year.

And -- even in the March quarter, is that the case?

Yes.

Okay. And my second and final question is, I know on an annual basis in the Ks, you've usually been able to disclose your percent of revenues from prescription products and non-prescription products. And just wondered if you had those statistics available now?

Prescription, for the fiscal year -- I will give you for the fiscal year, was about approximately 38% of the business. And OTC, 61%; and freight, 1%.

Okay. Thanks very much.

You're welcome.

Thank you. Our next question comes from Mitch Bartlett from Craig-Hallum. Your line is open.

Just trying to understand whether most of the weakness in the gross profit margin came from the OTC side of the business. And as we go into the seasonally more -- larger flea and tick, June and September quarters, whether that pressure on prices will be magnified in the gross margin, going forward? In the mix? Can you help us in understanding where the weakness in the gross profit margin came from?

Yes, the weakness in the gross profit margin is coming from OTC.

So, by that take, then, as OTC grows as a percentage of sales, we'll see more weakness than we just saw. Gross profit margin should actually go down below the level you just showed us.

That would be a logical conclusion.

Good. Thank you very much.

You're welcome.

Thank you. And I'm currently showing no further questions. I'd like to turn it back over to the speaker for closing comments.

Thank you. To address the decrease in sales for the last fiscal year, we implemented a more aggressive price strategy, combined with increased advertising, while continuing to expand our product offerings into pet supplies. This wraps up today's conference call. Thank you for joining us. Caroline, this ends the conference call.

Thank you for participating. You may now disconnect.