Petmed Express Inc (PETS) 2011 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, 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 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 this time, I would like to turn the call over to the Company's Chief Financial Officer, Mr. Bruce Rosenbloom. Sir, you may begin.

Thank you. Good morning. 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.

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 will compare our second fiscal quarter and six months ended on September 30, 2011 to last year's quarter and six months ended on September 30, 2010.

Our results have been impacted by our more aggressive flea and tick product pricing as a response to increased competition, and our results were further impacted by the introduction of generic Frontline to the market. Due to pending patent litigation unrelated to the Company against one of the generic Frontline products, we chose not to actively participate in the generic flea and tick market which negatively impacted our sales.

For the second fiscal quarter ended on September 30, 2011, sales were $58.2 million compared to sales of $61.2 million for the same period the prior year, a decrease of 4.9%. For the six months ended on September 30, 2011, sales were $131.8 million compared to $135.6 million for the six months of the prior year, a decrease of 2.8%. The decreases were due to decreased new order and reorder sales.

For the second fiscal quarter, net income was $3.9 million or $0.19 diluted per share compared to $5 million or $0.22 diluted per share for the same quarter the prior year, a decrease to earnings per share of 13%. For the six months net income was $8.8 million or $0.41 diluted per share compared to $12.2 million or $0.54 diluted per share a year ago, a decrease to earnings per share of 23%. The decreases were mainly due to lower sales and decreases in gross profit margins as a result of more aggressive pricing on flea and tick products.

Reorder sales decreased by 5% to $45.5 million for the quarter compared to reorder sales of $47.9 million for the same quarter of the prior year. For the six months, the reorder sales decreased by 3.2% to $102.1 million compared to $105.5 million for the same period last year. These decreases were also due to lower pricing on flea and tick products as a response to increased competition.

New order sales decreased by 4.7% to $12.7 million for the quarter compared to $13.4 million for the same period in the prior year. For the six months, the new order sales decreased by 1.4% to $29.7 million compared to $30.1 million for the same period last year.

We acquired approximately 184,000 new customers in our second fiscal quarter compared to 185,000 for the same period the prior year, and we acquired approximately 410,000 new customers in the six months compared to 404,000 for the same period a year ago.

Our average order was approximately $76 for the quarter compared to $79 for the same quarter the prior year, and approximately 74% of our sales were generated on our website for the quarter compared to 72% 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 second fiscal quarter, our gross profit as a percent of sales was 34.2% compared to 36.5% for the same period the prior year. And for the six months, our gross profit as a percent of sales was 33.4% compared to 36.5% for the same period a year ago. The percentage decreases can also be mainly attributed to more aggressive pricing and increased product costs.

Our general and administrative expenses as a percent of sales were 9.6% for the quarter compared to 9.4% for the same period a year ago, and for the six months it was 8.9% compared to 8.8% for the six months the prior year.

For the quarter we spent $7.9 million in advertising compared to $8.6 million for the same quarter the prior year. For the six months, we spent $18 million in advertising compared to $17.4 million a year ago.

The advertising cost of acquiring a customer was $43 for the quarter compared to $46 for the same quarter the prior year. For the six months, it was $44 compared to $43 for the same period a year ago.

We had $47.1 million in cash and cash equivalents, $10.3 million in short-term investments, $2.7 million in long-term auction rate securities investments and $19.1 million in inventory with no debt as of September 30, 2011. Net cash from operations for the six months was $16.2 million. Capital expenditures for the six months were approximately $160,000.

In accordance with our share repurchase program, we repurchased approximately 894,000 shares, paying approximately $9.1 million during the quarter, and we repurchased approximately 2 million shares, paying approximately $22.6 million in the six months.

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

(Operator instructions) Kevin Ellich, Piper Jaffray.

I have a few questions here. Regarding the lower margins or better margins, did the spot rate advertising rates change during the quarter, or did you just pull back on spending? And then going forward, do you plan to keep spending levels for advertising at the current run rate, or what is your view on how the spot rate market is going to change over the next few quarters?

The reason we spent less in advertising was we did not like the response that we were getting to our -- [done] creative, and that's the main reason. We intend to spend more dollars in advertising going forward than in the prior year.

Okay, and then, what is your primary uses of your discretionary capital going forward? Will you continue to buy back stock? Where are you at with the share buyback authorization?

I think, as of September 30, we had about $15 million remaining in our stock buyback plan, and we also paid dividends quarterly.

So you will just continue to pay the dividend, buy back stock; is that the plan?

At this time, yes.

Got it. And then what is your outlook on the competitive landscape? Are you seeing much in terms of increased competition, or is it pretty much the same?

It's -- what happened is generic Frontline was entered to the market -- introduced to the market, I should say -- and that added additional competition which we did not participate in the generic market actively, which hurt our quarterly numbers.

Sure. And then the last question is the average order size of $76, down about 4% year-over-year. Do you expect that to come back to normalized levels, or what do you think is going to happen on that front?

Well, next year the comparison will be easier. As you know, we reduced our flea and tick product this year, which is causing the drop in the average order size.

Excellent, thank you.

Michael Kupinski, Noble Financial.

I was wondering if you can just chat a little bit about the advertising environment right now, especially for remnant TV space heading into this quarter. First, let's start there.

It's -- we are able to clear, so there's no problem for us running commercials. But usually fourth quarter, as you know, it's our off-peak season. So at this time we are clearing what we are intending to clear.

Can you just talk a little bit about the pricing environment? I know that some of the scatter prices have started to come down a little bit. What are your thoughts about that?

The pricing actually is better than last year at this time.

And in terms of the creative, I knew that you've changed the creative. What are your thoughts about the current creative?

We have been running the current creative about three weeks now and it's performing better, so we are cautiously optimistic.

And in terms of the fact that you had lower advertising in the last quarter, how do you think -- typically, you need to kind of stay in front of your customers. Do you think that that might affect -- the fact -- the lower amount of advertising might affect your reorder sales going into the next quarter?

The reason the reorders -- I don't think it will impact the reorders. Our sales are advertising-driven, but the reason we advertise on TV is actually to acquire new customers. I'm sure it helps reorders too, but the main purpose of it is to acquire new customers.

And do you have any thoughts on staying in front of your new customers, given that you were spending at a lower volume going into the quarter, then?

It boils down to -- if our advertising is more effective, we will spend more money and we will be more aggressive. And currently, that's the case. But in the September quarter, we didn't like the response that we were getting. That's why we were not as aggressive.

In terms of going into the fourth quarter, then, you said you anticipated spending more. Is that on a sequential basis, or are you talking year-over-year?

Year-over-year.

Okay, all right, thank you very much.

Anthony Lebiedzinski, Sidoti & Company.

My first question is on the gross margin. While down certainly from last year, it did improve sequentially from the June quarter. What would you say is the biggest reason for that sequential improvement in the gross margin?

Product mix was different. We had more prescription business and less OTC business.

And right now, where is your prescription business running as a percent of total revenue?

We are not going to disclose that quarterly.

Okay. Just looking at the advertising strategy going forward a little bit longer term, are you still going to do mostly TV advertising? And also, next year we do have the Olympics and also the presidential election. So what are your thoughts on longer-term as to how you think about the advertising strategy going forward?

We may shift some advertising to online. We are testing several ways to do that, and if the television advertising gets tight, the remnant space, we will likely shift the dollars to online advertising.

And what are -- the pricing that you are seeing on online advertising, what are you seeing now versus a year ago? Can you give us a comment on that?

It depends. The paid search is higher -- the cost is higher on paid search. But other advertising -- actually, there are some remnant space availabilities now. So it depends.

Okay, and last quick question on the pet supplies initiative, can you talk about like what you've seen there, any sort of anecdotal commentary about that? That would help, certainly.

We continue to grow the pet supply business, so we need to continue to expand the product offerings to take advantage of that going forward.

All right, thanks.

Mitch Bartlett, Craig-Hallum.

You talked about you are now clearing everything you want to clear, but in the last quarter you curtailed advertising because it didn't meet your requirements. Could you just expand on that? What are you intending there?

The September quarter -- what's important is just, in general, is the effectiveness of the advertising more than how much dollars we're spending. So we didn't like the effectiveness of the advertising, the response we were getting first part of the September quarter. That's why we were not aggressive and that's why we did not spend as much as we intended to. And in October, that picture changed. We don't know, obviously, what's going to happen in November and December, but we intend to spend more money in the quarter that we are in.

Than you did a year ago or --

Yes, than we did a year ago. I'm not comparing it to September quarter.

Okay, and then for the full year, might you spend more than you did for the full year last year?

We intend to, yes.

Okay. How do you view your pricing right now, specifically as to flea and tick, vis-a-vis the rest of the online players, especially with regard -- maybe you could comment on whether you see wag.com as a potential large entry or not.

We are very competitive price was, and the -- wag.com is going to sell pet supplies. I'm sure they will probably participate also in OTC pet medications, but time will show.

So if we were to look out a year, you don't see any major changes in pricing strategy or anything changing your overall mix of pricing right now?

All I can tell you is we will be competitive, and currently we are competitive.

Good, thank you.

Edward Woo, Wedbush Securities.

Can you just tell us what the new order sales in the quarter was again?

Yes. The new order sales were $12.7 million for the quarter.

Okay, and then the other question I had is, did gross margin change on the prescription side of the business? And is that business typically higher-margin than your OTC business?

Yes, it is higher-margin.

And did margins change in the quarter for that business?

Not for the quarter, just the product mix was different. So we had more prescription business than last year same quarter.

Okay, and then my last question is, obviously, we saw Frontline impacting your business when they came out with generics. Are there any other products that you guys have that is possibly in the same position where you may see generics coming out soon?

We are not anticipating anything soon in any big brand, and we intend to participate on the generic Frontline market, which we did not actively do that.

Okay, thank you and good luck.

(Operator instructions) Ross Taylor, CL King.

I just have 2 questions. I just wondered if you could elaborate on your Frontline generic strategy at all. I imagine this is going to be a product with a 1-800 PetMeds brand on it, but just wanted to clarify that as well as the timing of when these might be introduced.

And then my other question relates to the advertising spend. Would you envision over the next couple of quarters that your acquisition cost per customer kind of hovers in that $43 to $45 range, where it has been for the last six months?

As far as generic Frontline is concerned, all I can tell you is that we will fully participate in the generic market, making the consumer aware that we carry the generics. But as far as specifics, I'm not going to get into it, due to competitive reasons.

As far as acquisition cost of new customers, I don't know at this time. So I would go -- if I were you, I would just go with the average for the last six months or so.

Okay, that's helpful color, thank you.

Kevin Ellich, Piper Jaffray.

I just had a quick follow-up on the gross margin comment. You said that it was due to product mix, more OTC, and prescriptions were down. What do you think is causing that? Is that more --

It's other way around; less OTC, more prescription is what I said

More prescriptions?

Yes.

Which is why the margins are better? Got it.

That is correct, yes.

Thanks.

Mitch Bartlett, Craig-Hallum.

I just wanted to ask a follow-up on the generics. You will fully participate -- how important are generics to flea and tick to the overall sales of the Company, do you think, going forward?

Well, the generics captured more market share than what we anticipated and they have only been in the market for the last five months, I think. So, since they captured more market share, obviously it's in our best interest to fully participate in it. And it has higher margins, too. Generic products have much higher margins.

Much higher?

Yes.

Very good, thank you.

Thank you very much. I now would like to turn it back to Mendo Akdag for any closing remarks.

Thank you. To address the decrease in sales and profits, we intend to fully participate in the generic flea and tick market and revise our marketing to improve effectiveness in the current environment.

This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call.

Thank you, sir. And again, thank you, everyone. The conference has concluded. All lines may please disconnect.