Petmed Express Inc (PETS) 2011 Q3 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 of the third fiscal quarter ended on December 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 nonprescription 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 PetMed's 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 conference call over to the Company's Chief Financial Officer, Mr. Bruce Rosenbloom. And sir, you may begin.

Thank you. Good morning. 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, President and Chief Executive Officer of 1-800-PetMeds.

Thank you, Bruce. Welcome, everyone. Thank you for joining us. Today, we will review the highlights of our financial results. We will compare our third fiscal quarter and nine months ended on December 31, 2011 to last year's quarter and nine months ended on December 31, 2010.

For the third fiscal quarter ended on December 31, 2011, our sales were $50.5 million compared to sales of $45.1 million for the same period the prior year, an increase of 12%. For the nine months ended on December 31, 2011, sales were $182.3 million compared to sales of $180.7 million for the nine months the prior year, an increase of about 1%. The increases were due to increases in new order and reorder sales during the quarter.

For the third fiscal quarter, net income was $3.9 million, or $0.19 diluted per share compared to $4.5 million, or $0.20 diluted per share for the same quarter the prior year, a decrease to earnings per share of 3%. For the nine months, net income was $12.7 million, or $0.61 diluted per share, compared to $16.7 million, or $0.74 diluted per share a year ago, a decrease to earnings per share of 17%. The decreases were mainly due to a decrease in gross profit margins as a result of more aggressive pricing, an increase in advertising in order to increase sales.

Reorder sales increased by 8% to $40.5 million for the quarter compared to reorder sales of $37.3 million for the same quarter the prior year. For the nine months, the reorder sales were relatively flat at $142.5 million compared to $142.8 million for the same period a year ago.

New order sales increased by 29% to $10.1 million for the quarter compared to $7.8 million for the same period the prior year. For the nine months, the new order sales increased by 5% to $39.8 million compared to $37.9 million for the same period last year. The increases were due to an increase in advertising and a decrease in customer acquisition costs during the quarter.

We acquired approximately 150,000 new customers in our third fiscal quarter compared to 111,000 for the same period the prior year. And we acquired approximately 560,000 new customers in the nine months compared to 515,000 for the same period a year ago.

Our average order was approximately $73 for the quarter compared to $77 for the same quarter the prior year. The decline was due to more aggressive pricing. For the quarter, approximately 77% of our sales were generated on our website compared to 72% for the same quarter last year. As a result, our online sales increased by 19% for the quarter compared to the same period last 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-seasons.

For the third fiscal quarter, our gross profit as a percent of sales was 34% compared to 37.5% for the same period a year ago. For the nine months, our gross profit as a percent of sales was 33.6% compared to 36.8% for the nine months a year ago. The percentage decreases can be attributed to more aggressive pricing and increased product costs.

Our general and administrative expenses as a percent of sales were 10.4% for the quarter compared to 11.3% for the same quarter the prior year. And for the nine months, the G&A expenses as a percent of sales were 9.3% compared to 9.4% a year ago. With increased sales for the quarter, we showed improvement in leveraging the G&A.

For the quarter, we spent $5.4 million in advertising compared to $4.4 million for the same quarter the prior year, an increase of 23%. For the nine months, we spent $23.5 million for advertising compared to $21.9 million for the same period a year ago, an increase of about 7%.

Advertising cost of acquiring a customer for the quarter was approximately $36 compared to $40 for the same quarter the prior year. And for the nine months, it was the same $42 compared to the same period a year ago. The decrease for the quarter was due to increased response to our advertising.

We had $42 million in cash and temporary investments, $10.3 million in short-term investments, $1.5 million of long-term option rate securities investments and $25.9 million in inventory with no debt as of December 31, 2011. The inventory was increased due to favorable buying opportunities, which resulted in lower net cash from operations compared to the same period last year.

In accordance with our share repurchase program, we repurchased approximately 118,000 shares, paying approximately $1 million during the quarter. And we repurchased approximately 2.1 million shares, paying approximately $23.7 million in the nine months. This ends the financial review. Operator, we are ready to take questions.

(Operator Instructions). Kevin Ellich, Piper Jaffray.

Good morning. Thanks for taking my questions. I have got a few. First, could you talk a little bit about the advertising costs and actually the messaging? I noticed a few of the changes this quarter and it seems like the TV ads were down also. Were you pulling back on TV and maybe pushing more online? Is that what drove the better sales?

TV ads were similar to the last year, so it was not less last year same quarter, but the increase in advertising for the quarter was mainly online, which performed well. Also, we used different creatives and they performed better.

Got it. And then recently there was a vet conference held in Florida and one of the things that some of the vets at the conference brought up was changing the message. Have you thought about that at all in terms of working maybe a little bit more with the industry?

We will consider that.

Okay and then what are your expectations for costs going forward, especially in the election year on the advertising front?

That is tough to say. So at this point, we are doing better, but as the year progresses and general election time comes up, it may get a little tougher on TV. We anticipate shifting dollars to online, which, as I mentioned, performed well the last quarter.

Got it. And then two last quick questions here. One, have you noticed any significant changes in the competitive landscape? It seems like there is more e-commerce platforms and other websites that are trying to compete essentially with the online pharmacy model. And then two, in your press release, you talk about expanding the product offering. Just wondering if there was any specific products like Trifexis maybe that helped boost sales in the quarter.

As far as products, when there is demand for a product, if it is a pet medication, obviously, we are going to carry it. That is what we do. That is our niche business. We have not seen any major competitive difference in the landscape in the December quarter. And as far as the medication that you mentioned, we carry it.

Understood. But do you think the landscape is going to get more competitive? Have you thought much about how that could play out?

Yes, we would anticipate that it will get more competitive, but we compete by giving superior service to our customers and we are in a niche business. We are a full-service pharmacy. So the other players typically are carrying -- are not going to carry everything that we carry.

Understood. Thanks and nice quarter.

Thank you.

Michael Kupinski, Noble Financial.

Thank you and congratulations on your quarter. A quick question. In terms of the television advertising yield is still obviously below two times, which has historically been a metric that you indicated is the expected return that you would like to have for your advertising. I was just wondering how were the online advertising compared to your television advertising in terms of the metrics -- the yield that you anticipate there?

Well, average order size was lower overall due to our more aggressive pricing. That is why the matrix was less than $2.

So do we anticipate -- are you seeing the yield different for television versus your online advertising?

That is really difficult to -- what gets credit is -- when you use a multichannel approach and the channels complement each other and it is difficult to separate them and look at them individually.

And then so do you think that the metric then now should be lower than two times? Is this the new norm so to speak?

That is what you have been seeing I think for more than a year now. So you can look at the past numbers and draw your own conclusions.

Okay. In terms of advertising as a percent of sales, how should we look at how you budget your advertising line item? Should we look at it as a percent of sales or expected sales or how do you fluctuate that number?

In dollars, we anticipate to spend more money, but in our 10-K and I think in our 10-Qs, we said about 13% is what we are anticipating for the fiscal year that we are in.

Okay and then, in this last quarter, I guess it was around 11%, so you anticipate to step that up a little bit more aggressively I would imagine?

It is going to fluctuate from quarter to quarter. Obviously, it was our off-peak season, so it could range from 10% to 15%, 16%, but the average for the fiscal year we are anticipating is going to be around 13%.

Okay. And obviously, we weren't -- in the last quarter, we didn't have a lot of -- flea and tick wasn't the strongest season and we are going to be entering that important marketplace. How do you think that your generics will fare compared to the likes of other major retailers out there and that might begin to step up their campaigns as they enter the heavy season for flea and ticks?

First of all, we don't have our own generic yet at this time, so we are going to carry what the market is carrying, what everybody else is carrying.

And will that, I assume, be at a lower price because of your -- your creative (inaudible) kind of indicates that?

Lower price compared to what?

To let's say the Walmarts of the world.

We will be competitive.

Okay. Okay, well, that is all I have for now. Thanks.

Anthony Lebiedzinski, Sidoti & Co.

Good morning. I just wanted to first clarify an earlier question. You had said that you expect the market to get more competitive. Is it because of the seasonality of the business you expect that to be more competitive or do you actually expect more competitors to enter the market?

Seasonality of the business, off-peak season is less competitive.

Got it, okay.

So again, summer, it is more competitive.

All right. And which areas of the business are you seeing the greatest pressure on product costs?

Typically, the manufacturers raise their prices every year, both on OTC and prescription. It ranges 3% to 5%. So on average, I would say about 4%. But it is both for prescription and over-the-counter.

And can you give us any flavor as to how your prescription medications business did versus your OTC in the quarter?

The prescriptions are very well, but also OTC did well in the December quarter.

Got it, okay. And going forward, what do you expect as far as your product pricing strategy? We have had certainly several quarters of gross margin pressure. Going forward, do you expect to maintain your product prices or do you think that you could take another look at your product prices?

Well, market forces will dictate that. Having said that, we are currently very competitive with our pricing, so I can't tell you what is going to happen in the future, but always have to be competitive with our prices and the market forces will dictate that.

Okay. All right, thank you.

Erin Wilson, Bank of America-Merrill Lynch.

Hi, I had a quick question on -- can you I guess speak to the implication of recent industry consolidation? Specifically, I think last week I noticed a couple of online pet pharmacies merged and there has been some M&A in this space. Do you I guess anticipate any changes to your capital deployment strategy near term or do you just think that you will just stay with the share repos and dividend?

We will just stay with the share repurchase and dividend programs at this time.

Okay. And I guess what percent of your OTC and prescription business is generic now and where do you anticipate that going once you start participating in the generic Frontline market?

It is single digits. I can tell you that the generic sales increased in the December quarter compared to the September quarter although it was our off-peak season and we are anticipating a bigger impact in spring and summer.

Okay. And the Frontline products will I guess demonstrate some sort of a higher profit I guess possibility compared to the other generics or --?

The generics usually have higher gross margins, yes.

Okay. All right, thank you.

(Operator Instructions). Ross Taylor, CL King.

Hi, just two or three quick questions. I guess, first of all, can you just elaborate -- you made a comment in the press release about expanding product offerings and you mentioned the generics, but I don't think during the call you have talked at all about how your initiative in expanding into some additional pet supplies is going or just kind of any recent trends there of what our expectations should be.

We continue to expand product offerings to pet supplies. It is doing well; it is growing. We started about a year ago. So when you start from zero, it is easy to increase. But we think there is a potential there and we will continue to add products.

As far as generics, whatever is out there, we are going to carry it. We were a little slow last year, as I think I mentioned in the last conference call, on participating in the generic flea and tick market. So we will be very aggressive this year.

Okay. And two other questions on the subject of generics. I mean do you think you will carry your own different [ill-based] product I mean sold under the 1-800-PetMeds brand? And then my last question just relates to advertising rates. But how were your TV advertising rates during the quarter, as well as your Internet advertising rates? Were they stable or did they improve at all?

As far as advertising is concerned, actually the rates were slightly better this year on television compared to the last year's December quarter. Online was probably a little bit -- on the paid search -- and it was a little bit more expensive.

Okay. And you also just -- maybe my question about the generics, (inaudible) got lost in the beginning. I just don't --.

I am not going to comment on that due to competitive reasons.

Okay. Sure enough. Thanks very much.

Mitch Bartlett, Craig-Hallum Company.

Thank you. Just were there any promotions to the base, to the repeat customer base unusual this year that weren't in last year's numbers? And then maybe could you speak to the strength of sales through the quarter -- October, November, December -- how it fared through the quarter? Thank you.

We always have promotions. We had a strong promotion also in the December quarter for existing customers. As far as the monthly, I am not going to get into a monthly reporting.

Sure, sure. As far as the promotions though, they were not unusual this year versus last year?

I would not call it unusual, no. They were a little bit more aggressive, but they are not -- we have done them before, so they are not necessarily unusual.

Okay, thank you.

Michael Kupinski, Noble Financial Company.

Thanks. I just want to circle back on a couple of additional ones here. In terms of your advertising strategy and buying remnant advertising, virtually all of your TV spend was still in remnant?

The vast majority, yes.

And can you talk about the environment in remnant TV space at this point?

It is similar to last year, so it has not changed.

Has pricing increased? You mentioned that the pricing was better in the last quarter. Has pricing --?

We are paying slightly less than last year.

Slightly less than last year, okay. And in terms of the -- obviously, the cost of sales you indicated increased because that manufacturing prices have increased and at the same time, it is a much more competitive environment. Is the cost of sales -- do you have any thoughts in terms of the percentage of the cost of sales of revenues going forward?

All I can tell you is we are competitive with our current pricing at this time. So I would say probably similar margins to the last nine months would be my guess with a caveat that obviously if the market changes, we have to be competitive.

Okay. And then it seems like in terms of your share repurchases, you kind of slowed down in the last quarter. Can you talk about your appetite to buy back stock at this point?

We had a plan in place, so that plan triggers or doesn't trigger the buy, so that is why it was what it was in the December quarter. As far as if we change the plan, we may -- we will consider that.

Is that just based on the stock price?

Obviously, we can only change the plan when there is nothing -- after we release our numbers, so that is why we had -- wait for. But as far as our thinking is concerned, I am not going to share it with you.

Okay, all right, thanks very much.

And I am showing no further questions at this time. And now I would like to turn it back over to Mr. Akdag. Sir, you may begin.

Thank you. Going forward, we will continue to advertise aggressively while expanding our product offerings, which include generic pet medications. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call.

Thank you. Thank you for participating and you may disconnect at this time.