Petmed Express Inc (PETS) 2011 Q1 法說會逐字稿

Welcome to the PetMed Express Incorporated, doing business as 1-800-PetMeds, conference call to review the financial results for the first fiscal quarter ended on June 30, 2011. 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 and cats, 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 PetMeds family of brand names. 1-800-PetMeds provides an attractive alternative for obtaining pet medications in terms of convenience, price, ease of ordering, and rapid home delivery. At the request of the Company, this conference is being recorded.

At this time, I would like to turn the call over to the Company's Chief Financial Officer, Mr. Bruce Rosenbloom.

Thank you. 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'll compare our first fiscal quarter ended on June 30, 2011, to last year's quarter ended on June 30, 2010.

For the first fiscal quarter ended on June 30, 2011, our sales were $73.6 million, compared to sales of $74.4 million for the same period the prior year, a decrease of 1.1%. The decrease was due to a decrease in reorder sales, offset by an increase in new order sales.

For the first fiscal quarter, net income was $4.8 million, or $0.22 diluted per share, compared to $7.2 million, or $0.32 diluted per share for the same quarter last year, a decrease to earnings per share of 30%. The decrease was mainly due to a decrease in gross profit margins, as a result of more aggressive pricing on flea and tick products, and an increase in advertising expenses.

Reorder sales decreased by 1.7% to $56.6 million for the quarter, compared to reorder sales of $57.6 million for the same quarter last year. This decrease was also due to lower pricing on flea and tick products, as a response to increased competition. New order sales increased by 1.3% to $17 million for the quarter, compared to $16.7 million for the same quarter the prior year. We acquired approximately 226,000 new customers in our first fiscal quarter, compared to 220,000 for the same period the prior year. Our online sales increased by 3.4% to $54.1 million for the quarter, compared to $52.3 million for the same quarter the prior year, and approximately 73% of our sales were generated on our website for the quarter, compared to 70% for the same period the prior year.

Our average order was approximately $80 for the quarter, compared to $82 for the same quarter the prior year. The decline was due to the more aggressive pricing. 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 32.8%, compared to 36.6% for the same period a year ago. The percentage decrease can also be attributed to more aggressive pricing and increased product costs.

Our general and administrative expenses as a percent of sales were the same, 8.3% for the first fiscal quarter, as it was for the same quarter the prior year. We spent $10.1 million in advertising for the quarter, compared to $8.8 million for the same quarter the prior year, an increase of about 14%. The advertising costs of acquiring a customer was $45 for the quarter, compared to $40 for the same quarter the prior year.

We had $49.4 million in cash and cash equivalents, $10.2 million in short-term investments, and $26.1 million in inventory, with no debt as of June 30, 2011. During the quarter, we redeemed $7.7 million of our auction rate securities, at par value, which resulted in a remaining balance of $4.8 million. Net cash from operations for the quarter was $8.5 million. Capital expenditures for the quarter were approximately $82,000. In accordance with our share repurchase program, we repurchased approximately 1.1 million shares, paying approximately $13.6 million during the quarter.

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

Thank you. At this time, we'll begin the question-and-answer session. (Operator Instructions). Our first question comes from Kevin Ellich from Piper Jaffray. Your line is open.

Good morning. Thanks for taking the questions.

Good morning.

I was just wondering if you could talk about the competitive landscape, and the environment for advertising. It seems like the costs continue to go up, at least the acquisition per new customer costs. Where do you see that going in the next couple quarters?

The competition has increased, and the consumer is giving greater consideration to price. Generic Frontline has been introduced to the market, which is going to impact the market also, going forward.

As far as advertising is concerned, the scatter market really eased up, so we did not have trouble clearing what we wanted to clear. The reason the customer acquisition cost was higher was really less response, due to increased competition. Also, online search engine marketing costs increased, again, due to competition.

Okay. And then do you see those costs continuing to increase throughout the year?

We'll do everything we can so it doesn't. No, we're not anticipating that. We just need to be more efficient, and do a better job of differentiating ourselves, and come up with a better creative.

Okay. And then you mentioned Frontline going generic, and we all know that Frontline Plus has a competitive challenge in the market for PetArmor Plus. Just wondering what type of impact that would have on your business? Looking through the filings, I think it says that seasonal or flea and tick medications accounts for about 22% of your revenue. Is that right?

No, it's not. We never disclosed what percent of our revenue is the flea and tick category.

Okay. Actually, then, I do -- maybe I could just get a little clarity, because in the filing it is a little ambiguous, saying the majority of product sales affected by the seasons accounted for 22% of -- for March 31. Was that all seasonal medications, or what exactly does that 22% represent?

I think 22% of the total sales was probably the March quarter. Is that what you're --?

So that's the seasonal medications, then?

Yes, that's the seasonal, yes.

Okay.

But it's not just flea and tick. It's also -- heartworm impacts it.

Understood. Okay. Then maybe could you talk about the uses of cash on the balance sheet, or prioritize the uses of free cash flow and discretionary capital?

Currently, we have about -- I believe about $4 million remaining in our stock buyback plan, and we are paying dividends, as you know.

Okay. And then Bruce, one quick question for you. Inventories increased sequentially over the last couple years. We've seen it go down after the end of the fiscal year. I guess, what changed or why did it increase this quarter?

I mean, basically, inventory will fluctuate based on buying opportunities. So obviously it was a different situation last year than it is this year, and so if there's a great opportunity, we'll take advantage of it. If not, then you'll see inventories at a lower level.

Understood. Okay, thanks, guys.

You're welcome.

Our next question or comment comes from Michael Kupinski from Noble Financial. Your line is open.

Thanks, and appreciate the question. Going back to inventory levels, I was just wondering if you can just chat a little bit about that -- where you are in terms of inventory now versus last year. I know that you're running 20% off of everything on your website, and I was just wondering if you could give us a little color on where inventory levels are, should be or expected to be in the next quarter.

Inventory levels will fluctuate, as Bruce pointed out, based on buying opportunities. If there are buying opportunities, the inventory levels will be higher. If not, it will be lower. So it depends.

Are you concerned about inventory levels? Have you typically given 20% off everything at this time? Is this the first --?

No, we're not concerned about inventory levels. It has nothing to do with the campaign that you just mentioned.

Okay. And reorder sales being down, obviously that's your most profitable part of your business. Do you believe that could stabilize in a competitive pricing environment?

What caused reorder sales to be lower was our lower pricing on the flea and tick category.

Right.

Also, decline in new orders last year had a negative impact on reorders this year.

Would you expect that reorder sales would continue to have some pressure, given the competitive issues?

It could, but if we look at reorders as a percent of prior year's total sales, actually for the quarter it was up 1%. It was 75% compared to last year's June quarter was 74%.

Okay. And then in terms of -- Mendo, you had in the past indicated that advertising yields should be around $2, that sort of thing, primarily because if you -- you had indicated if you couldn't get those types of yields that you may seek other ways to advertise or reach customers. Can you talk a little about advertising yields, where you think that they might bottom or maybe start to improve, and how you might be able to do that?

We're getting less response to our advertising, so we need to test new creatives. We need to do a better job of differentiating ourselves in our advertising, and we're working on that. So, we would have to test new creatives, and come up with better performing ones.

And the type of creatives that you have been using is pretty much comparing your prices to Frontline and so forth. Now with the introductions of generics, what message do you think you need to change in terms of your creative, to hit home to the customers and improve sales?

Well, I'm not going to discuss that with you in this call.

Fair enough. And could you just tell me what were the shares outstanding at the end of the quarter?

This year's outstanding?

Yes, this year's outstanding.

As of June 30?

Yes, as of June 30.

It was 21.2 million, somewhere in that range.

Okay.

Outstanding shares.

I didn't get the question, sorry.

That's okay. Thanks, I appreciate --.

One comment I want to make is the Frontline Plus, it was mentioned, PetArmor Plus, the last month US Patent Office upheld the patent for Frontline Plus. So currently, there's a 60-day stay that they can challenge the decision, but if the decision stays, the PetArmor Plus will be off the market.

Right. And how's that reflected in the FiproGuard as well, and other generics?

That's same for FiproGuard Plus, but they will be able to have a generic for Frontline Top Spot, which is an older generation product. But if the decision stays, they're not going to be able to have a generic for Frontline Plus.

Okay. Thank you very much.

You're welcome.

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

Good morning. A couple questions here.

Good morning.

The gross margin over here, again, was pressured over the year. Is this the run rate that we should expect kind of going forward, or do you still expect that in the December and March quarters, you may show some sequentially better gross margins, given the seasonality of the business?

Right. Hopefully, we will. I would anticipate similar trends as the prior years, but lower, obviously, due to our more aggressive pricing.

And as far as the advertising strategy, are you still looking to primarily do your advertisements on TV, or are you perhaps shifting to more Internet advertising? And your thoughts on the social media and stuff like that.

Whatever performs better. So we test everything. So, what performs better, obviously, we're going to maximize the opportunity.

Okay. Thanks.

You're welcome.

Thank you. Our next question or comment comes from Mark Miller from William Blair. Your line is open.

Hi, good morning.

Good morning.

So multiple competitive factors that are impacting your business, and I would be interested, Mendo, on your opinion in terms of what's been the biggest change versus -- say, over the last couple years. Has it gotten harder to take share from vets? Is it that the online competition has gotten tougher? Or is it the entrance in a bigger way of the pet specialty channel capturing some of the convenience buyers?

Pet specialty channel, the brick and mortar, and also mass merchants entering the market, we believe had the biggest impact.

Okay. And then we've talked a fair bit about advertising so far, but as you've shifted more to testimonials here, I just was hoping you could elaborate on the thought process behind that change, and then actually 1 of them has just come out recently, you've got a new commercial. Based on your prior comments, can I infer from that you're not thrilled with the response on that so far?

We're not thrilled with the response that we got in the June quarter. That's why we made the change on the creative, but we only have been running it for a week now, so it's too soon to tell how it's going to perform.

Okay. Thanks.

You're welcome.

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

Thanks. Interested on the AOV. Given the fact that it's the biggest seasonal quarter, and flea and tick is a much bigger part of the percentage, and that generics were introduced, AOV seemed to hold up pretty strongly. Was there a change in the market basket?

We have done a pretty good job of upselling and cross-selling, so that's why it did not come down as much as it could have. So we are pleased that we were at $80.

What's happening inside the customer base? Are they -- are customers -- you've resisted answering this in the past, so I'll just put it out there. The mix of customers, new and used, and how quick people are moving off to competitive -- just the customer lifetime value.

Yes, I'm not going to disclose that, but the reorders as a percent of prior year's total sales is -- in dollars, is really what I can refer you to. That has been fairly consistent, as obviously reorders get a higher percent of the total sales. That percentage has come down a little bit, but it has been fairly consistent.

Great. Thank you.

You're welcome.

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

Good morning. I had a question about getting product from manufacturers. Is Advantage the main product that you can get direct? Has there been any change in either direct or distributor acquiring of products?

Advantage and K9 Advantix are the products that we can get directly. There are some other products that we get directly, but there has not been any major change in the last couple months.

Does that include the generics? Do you have to get that through distributors as well, such as Fipro?

Generics, we can get them directly.

Okay. And then the other question I had was -- how is your other pet supply business running? I know you guys had been trying to get into that area.

It is growing. It's still not, I would say, significant, but it's growing.

Great. Thank you.

You're welcome.

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

Hi, most of my questions have been answered, but maybe I'll just ask 1 about orders from returning customers. You mentioned something about, gosh, they were maybe only up about 1 percentage point as a percent of the mix, due to the slow or the declines in new customer orders last year. Does that mean, given that new customer orders were down 20%, 25% in September and December last year, that the returning customer orders might be challenged over the back half?

That is correct, yes. That's what I meant.

Okay. All right. Thank you.

(Operator Instructions). Thank you. I'm currently showing no further questions or comments. I'll turn it back to the speakers for closing comments.

Thank you. To address the decrease in sales, we implemented a more aggressive pricing 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. Operator, this ends the conference call.

Thank you for your participation. You may now disconnect.