Petmed Express Inc (PETS) 2011 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, 2012. 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 directs consumers to order by phone or on the Internet and aim to increase the recognition of the PetMeds family of brand names. The 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. And 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.

Now let me introduce today's speaker, Mendo Akdag, 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 fourth fiscal quarter and fiscal year ended on March 31, 2012 to last year's quarter and fiscal year ended on March 31, 2011.

For the fourth fiscal quarter ended on March 31, 2012, our sales were $55.9 million compared to sales of $50.9 million for the same period the prior year, an increase of 10%. For the fiscal year ended on March 31, 2012, sales were $238.3 million compared to $231.6 million for the prior fiscal year, an increase of 3%. The increases were due to increases in new orders and reorder sales.

For the fourth fiscal quarter, net income was $4 million, or $0.20 diluted per share, compared to $4.1 million, or $0.19 diluted per share for the same quarter the prior year, a 7% increase in earnings per share. For the fiscal year, net income was $16.7 million, or $0.80 diluted per share, compared to $20.9 million, or $0.92 diluted per share a year ago, a decrease to earnings per share of 13%. The decrease to net income for the year was primarily due to a decrease in gross profit margins as a result of more aggressive pricing and an increase in advertising to revitalize sales.

New order sales increased by 22% to $11.5 million for the quarter compared to $9.4 million for the same period the prior year. For the fiscal year, new order sales increased by 8% to $51.3 million compared to $47.3 million for the prior year. The increases were due to increases in advertising.

Reorder sales increased by 7% to $44.4 million for the quarter compared to reorder sales of $41.5 million for the same quarter of the prior year. For the fiscal year, reorder sales increased by 1% to $187 million compared to $184.3 million for the prior year.

We acquired approximately 162,000 new customers in our fourth fiscal quarter compared to 130,000 for the same period the prior year. We acquired approximately 722,000 new customers in the fiscal year compared to 645,000 for the prior year.

Our average order was approximately $76 for the quarter compared to $78 for the same quarter of the prior year. And it was $76 for the fiscal year compared to $79 for the prior fiscal year. The decline was due to more aggressive pricing.

For the quarter, approximately 76% of our sales were generated on our website compared to 73% for the same period the prior year. And for the year, it was 75% compared to 71% for the prior year. As a result, our online sales increased by 16% for the quarter and 8% for the 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 fourth fiscal quarter, our gross profit as a percent of sales was 33.9% compared to 34.3% for the same period a year ago. For the fiscal year, our gross profit as a percent of sales was 33.7% compared to 36.2% 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 9.7% for the quarter compared to 10.2% for the same quarter the prior year. And for the fiscal year, the G&A was 9.4% compared to 9.6% for the prior year. With increased sales for the quarter, we showed improvement in leveraging the G&A.

For the quarter, we increased our advertising spending to $6.9 million compared to $5.5 million for the same quarter of the prior year, an increase of 26%. For the fiscal year, we spent $30.4 million for advertising compared to $27.4 million for the prior fiscal year, an increase of 11%. Advertising cost of acquiring a customer for the quarter was relatively flat at approximately $43 compared to $42 for the same quarter the prior year. And for the fiscal year, it was $42, which was the same as the prior year.

We had $57.1 million in cash and temporary investments and $26.2 million in inventory with no debt as of March 31, 2012. Net cash from operations for the fiscal year was $20.4 million. Capital expenditures for the fiscal year were approximately $575,000. In accordance with our share repurchase program, we repurchased approximately 2.1 million shares, paying approximately $23.7 million in the fiscal year. There were no repurchases during the quarter. This ends the financial review. Operator, we are ready to take questions.

(Operator Instructions). Anthony Lebiedzinski, Sidoti & Co.

Good morning. I was wondering if you saw any pull-forward of demand for flea and tick products because of the warmer weather in the March period.

Yes, probably the warmer weather positively impacted flea and tick sales.

Okay. And I don't know if I may have missed this, but did you give a breakdown between your revenue between OTC and prescription medications?

No, I have not.

Is that something that I think the Company has provided on an annualized basis before?

I will give that to you now. Prescription was 40%; OTC 59%; and freight 1% for the fiscal year.

Got it, okay. And also can you comment on the competitive landscape for both OTC products and the prescription medications?

Typically, the competition increases during spring and summer. So that is the case this year also compared to the prior years.

Okay. And you are seeing that for both segments?

Yes.

Okay, all right. I will get back in the queue. Thank you.

Erin Wilson, Bank of America.

Hi, thanks for taking my questions. First, on the customer acquisition costs, they increased I guess year-over-year. Can you discuss some of the dynamics in the advertising market that were the primary factors, I guess, driving that trend?

It was relatively flat in the quarter. Customer acquisition cost was $43 compared to $42 for the same quarter last year. We spend a lot more money, so when you're spending more money typically incrementally, we are not going to be as efficient. So I would say the results -- that we were happy with the results.

Okay. And then looking at your cash conversion cycle, there was an uptick sequentially year-over-year in inventories in the quarter. And just is this a function of your overall growth, seasonality or attributable to some sort of fundamental shift?

Both seasonality and buying opportunities. So if there are buying opportunities, it is not unusual for us to increase our inventory. So it will fluctuate.

Okay. And then just one last one. Did you see an impact from the manufacturing issues at Novartis?

Yes, we have seen a negative impact on sales.

Can you quantify that?

It is difficult to quantify because we have been asking the prescribing veterinarian to prescribe an available brand. So some pet owners are loyal to the brand, so I would hesitate to quantify. I would say low to mid-single digits would be a rough estimate.

Okay, thank you so much.

Ross Taylor, CL King.

Yes, hi. A couple questions. I guess if you could comment at all about any of your advertising plans for fiscal year '13, whether you expect to be more aggressive than you were in the past fiscal year. It looks like for the year, I think you said your acquisition costs were flat at about $42. Do you think that number probably goes up in fiscal year '13 or just any color there would be helpful?

Our budget for advertising spending for the coming fiscal year we are in I should say is going to be higher than what we spent last year. Having said that, we have flexible budgets depending on how our advertising is doing, we will increase or decrease it. As far as where it is going to end up, the time will show. So we will see that as we announce the actual numbers.

Okay. And you also I think focused or emphasized generics or lower-priced medications more than you have in the past. Can you talk at all about what kind of impact that may have had on both increasing orders or on your revenues, as well as maybe on margins?

Generics, the price points are lower, so it is going to have a negative impact on sales. Obviously, we will have to sell more to make up for it. But generics have much higher gross profit margins, so they will help us stabilize the margins.

Okay. All right, that is all my questions. Thank you.

Kevin Ellich, Piper Jaffray.

Hi, can you, Bruce, maybe could you talk a little bit about the G&A expense as a percent of revenue. It was very low. Just wondering if there is more of it you guys can do or where should we expect that to go for the year?

We saved about 20 basis points year-over-year. Obviously, it was a function of increased revenue. At this point, when we look at G&A, we are always looking to improve. As far as going forward, it's a function of revenue. We will see where we can go. We really don't give any type of indication, but we are always looking to improve upon that number. So if you look at what we have done historically, around 9.4, there is always room for improvement. But as far as any further indication, we are going to try to improve upon that number, but it really depends on revenue.

Got it. Okay, that's helpful. And then going back to the comments about Novartis and the impact that you guys saw, were you able to make up for some of the lost sales by switching customers to other products?

That is what we are attempting to do, but some pet owners are loyal to the Novartis brand, so there is some negative impact to our sales.

Okay. And then last question is you've made a couple comments about competitive pricing and more aggressive pricing strategy. I'm just wondering if you can provide some more color, maybe quantify what the discount is and is it really just switching customers over to more generic product offerings or I guess what is the plan for the year.

I would say our pricing -- obviously, the market is going to dictate and we want to be competitive. So we survey the market and price accordingly and we will be aggressive, but the comparison is we have an easier comparison now to last fiscal year. And generics will help stabilize the market.

Okay. And then just one last quick question. Obviously, we have two nice quarters here with good growth. What do you think is driving that? Is it just the improving vet trends and are there any specific products that you could call out or is it just the general strength that we are seeing in the animal health market?

We will address it with our advertising. In the last quarter, we spent, I believe, 26% more than the prior year. So we have been aggressive both price-wise and advertising-wise. But I am not going to get into specific product --.

Thank you.

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

Hi, yes. How are the generics doing overall? Are they ramping as to your expectation? Can you give us some sense of how big they are now, how big they might be in the future? As they are playing a major role in stabilizing the gross margin, it would be useful to know.

They are increasing, but we are not going to give you any specific numbers.

Okay. And the warmer weather, does that have an effect on pulling forward demand as people buy six-month supplies or not?

It probably does, it probably does, but also if the warmer weather continues for the rest of the year, that means that overall more product is going to be sold.

Right. Thank you very much.

Anthony Lebiedzinski, Sidoti & Co.

Yes, good morning. I had a follow-up question. In regards to your advertising strategy, now with the presidential election coming up later, what is your strategy in terms of spending TV versus online and versus other channels?

We will continue shifting advertising dollars to online. Actually we have been doing that in the last six months. The increase in advertising has all been online.

Okay, thank you.

Michael Kupinski, Noble Financial.

Thanks and thanks for taking the questions. Mendo, I was wondering can you tell me what the advertising rates were up in the last quarter, in the fourth.

I would say it was similar to the prior year, probably slightly better on TV.

Okay. And what are you seeing as you go into the next quarter because obviously we haven't really seen the political advertising in this last quarter or even in this quarter much to speak of and it seems like the races are now just starting to heat up? What are we seeing in terms of pricing?

We are not seeing anything yet, but we anticipate that TV advertising inventory will get tight as the presidential election gets closer and our strategy is to shift dollars to online and that is what we have been doing actually in the last six months.

Okay, great. And what percentage of your advertising budget right now is online?

We are not going to disclose that.

Okay. And then in terms of the competitive landscape, I haven't really seen any advertising yet really pick up from like the Walmarts and the Targets and so forth. Do you have a read on what is going on in terms of the flea and tick market at this point?

We are just seeing the manufacturers; we are not seeing any individual retailer advertising at this time.

Okay. And what was the reason the Company didn't buy back stock in the last quarter? I know the stock got hit at least early in the quarter and then strengthened towards the end, but you didn't seem to buy back stock where at previous levels you were buying. What was the reason you didn't buy back in the last quarter?

We have a plan in place and the plan was put in place before the quarter and it didn't trigger a buy.

Okay. And in terms of the -- I guess the -- if we looked at the prices -- I'm sorry -- the average order size since -- I guess this quarter is going to be the first quarter that you really introduce the generics. The average order size, should we continue to expect that that's going to come down relative to this last quarter?

Yes, depending on what percent of the business switches to generics, it will.

And then in terms of any of your other -- you were trying at one point to develop additional accessories and things like that. Did you have any meaningful sales in the accessories in the last quarter?

It is growing, but we are not going to disclose specific percentages. But all I can tell you is it is growing.

Okay, that's all I have. Thank you.

Mr. Akdag, I turn it back over to you.

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

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