Petmed Express Inc (PETS) 2012 Q1 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 first fiscal quarter ended on June 30, 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 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 medication 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. Sir, you may begin.

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 on 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 will compare our first fiscal quarter ended on June 30, 2012 to last year's quarter ended on June 30, 2011. For the first fiscal quarter ended on June 30, 2012, sales were $69 million compared to sales of $73.6 million for the same period the prior year, a decrease of 6.3%. The unavailability of Novartis brands disrupted our sales during the quarter.

In addition, the decrease was due to the consumers purchasing smaller quantities, for example three packs instead of six packs, additional discounts given due to increased competition and a change in product mix to lower-priced items. Also, the peak season started early this year due to the warmer climate in the March quarter, which might have shifted sales from the June quarter to the March quarter.

For the first fiscal quarter, net income was $4 million, or $0.20 diluted per share compared to $4.8 million, or $0.22 diluted per share for the same quarter last year, a decrease to earnings per share of 12%. The decrease was mainly due to a decrease in sales. Reorder sales decreased by 2.8% to $55.1 million for the quarter compared to reorder sales of $56.6 million for the same quarter of the prior year. The decrease was due to a decrease in average order size.

New order sales decreased by 18% to $13.9 million for the quarter compared to $17 million for the same quarter the prior year. The decrease was mainly due to an increase in customer acquisition cost and decrease in average order size, in addition to slightly reduced advertising. We acquired approximately 197,000 new customers in our first fiscal quarter compared to 226,000 for the same period the prior year. Our average order was approximately $73 for the quarter compared to $80 for the same quarter of the prior year. The decline was also due to the consumer purchasing smaller quantities, the additional discounts given and a change in product mix to lower-priced items.

Approximately 77% of our sales were generated on our website for the quarter compared to 73% 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 first fiscal quarter, our gross profit as a percent of sales was 32.4% compared to 32.8% for the same period a year ago. The percentage decrease can be attributed to an increase in freight costs to improve service levels.

Our general and administrative expenses as a percent of sales was 8.6% for the first fiscal quarter compared to 8.3% for the same quarter of the prior year. The increase was due to lower sales. We spent $9.8 million in advertising for the quarter compared to $10.1 million for the same quarter the prior year, a decrease of about 2%.

We reduced advertising late in the quarter due to increases in costs. The advertising costs of acquiring a customer was $50 for the quarter compared to $45 for the same quarter the prior year. We had $57.4 million in cash and cash equivalents, $10.4 million in short-term investments, and $18.3 million in inventory with no debt as of June 30, 2012. Net cash from operations for the quarter was $13.8 million. Capital expenditures for the quarter were approximately $207,000. This ends the financial review. Operator, we are ready to take questions.

(Operator Instructions). Kevin Ellich, Piper Jaffray.

Good morning. Just wondering if you could quantify the impact of the various components that you think negatively hurt your sales this quarter, specifically the pull-forward of the sales you think that went into the March quarter. It sounds like you are unsure how much of an impact this had, if any.

Yes, that would be speculation on our part, which I don't want to get into, but other components I can give you a rough idea -- unavailability of the Novartis impacted -- our estimate is about $3 million to $4 million; shift to smaller size orders, lower packs is about $2 million; additional discounts given is about $1.5 million; and change in product mix is about $1 million to $1.5 million. Those are some rough estimates.

Okay. So basically the last one, the shift to different products and the smaller order size, are you actually seeing people substitute to more of the generic products or are they actually just buying different types of products?

Generic products with unavailability of Novartis, different type products also.

Okay. What can you do to make up for the manufacturing issues with Novartis? Is there anything that you guys have planned or strategically can try to push?

We have been asking the prescribing veterinarian to prescribe an available brand. Our rough estimate is about 60% are shifting and there is about 40% is our rough estimate that we lost due to unavailability of the brand. And some pet owners are loyal to the brand and they are waiting for its availability instead of shifting to another available brand.

Got it, got it. And then why do you think people are buying smaller quantities, the three pack instead of the six pack? Is it the macro environment or is it something else?

Our guess is it is a macro environment. The retailers are selling the smaller packs. They typically don't sell the largest packs and I think consumers getting trained to also compare and buy the smaller packs.

Got it. And then two last quick questions here. I guess what is your view on discounts going forward? Are you going to continue to be competitive? And also what is your outlook on the advertising rates in the coming months, both online and on television?

We are going to continue to be competitive, so the market forces are going to dictate our pricing. As far as advertising is concerned, we shifted some dollars to online and it did not perform as well as we anticipated and we cut back towards the end of the quarter. We are anticipating that TV inventory will be tight until -- it is a temporary phenomenon. Obviously, once November 6 is over, the elections will be over, so we think it will open up afterwards.

Got it. Thanks.

Mitch Bartlett, Craig-Hallum Company.

Sure, good morning. The 197,000 customers that you acquired, is there a change in what those customers are coming in for versus the last few years? This is a big flea and tick season, but did they perhaps maybe shift more towards the Rx side and is that why perhaps maybe (inaudible) customer acquisition has gone up?

No, it is similar to last year. There is no material difference between categories.

Okay. And then you said at the end of the quarter you kind of cut back because the online advertising wasn't panning out. Is there a point where you need to kind of push hard no matter what to continue to refresh the base of the customers?

It will -- I mean when there are better opportunities and the cost is more effective that is when we like to do that, and forcing it in an environment that the cost is higher. So the cost has its ups and downs and we prefer to be more aggressive when the cost is lower than when it is higher.

And then finally just the inventory was down year over year. Pretty aggressively you drew down the inventories. Was that because there was a lack of opportunity buys that met your criteria or what does that say about the kind of gross margins going forward?

It is lack of opportunity. There were no advantageous buying opportunities at the end of June, so that is why the inventory was where it was. What was your next question?

Well, just on that. Is that because there is just that much more places for that inventory to go, more competitive places or is it just a seasonal thing?

No, it is just the way it was, so it has its ups and downs buying opportunities. There were no reasons for us to have higher inventory; just there was no advantageous buying opportunities. As far as gross profit margins are concerned, we anticipate continued pressure on margins, but generics will help stabilize it.

Can you tell us what percentage of sales generic now represents?

We are not going to comment on that.

Okay, thanks very much.

Erin Wilson, Merrill Lynch Company.

Thanks for taking my questions. First, I guess what are your thoughts on the recently proposed [FDC] meeting on October 2 with regards to the pet prescription market and do you plan on I guess submitting some sort of a comment ahead of that workshop?

We are working on improving our relationship with the generic community, so we will -- we probably will not participate in it.

Okay. Could this be a potential positive or a negative for you?

It is a double-edged sword, so it could be either way. It is like they are opening to other sources, so obviously there will be much more competition if anything passes. So I would say it is a double-edged sword.

Okay, okay. And then I guess from a capital deployment standpoint, we really like the dividend, but does this sort of strategy suggest that the potential for getting maybe a better return possibly through acquisitions isn't an option or the acquisition pipeline isn't that robust or that valuations out there are unrealistically high?

We have a standing policy of not to comment on any possible mergers or acquisitions. But at this time, as far as -- obviously we have a strong balance sheet and we still have about $14 million remaining in our buyback plan and we are paying $0.15 dividend per quarter.

Okay, great. Thanks so much.

Michael Kupinski, Noble Financial Company.

Thank you and thanks for taking the question. I was wondering if you can talk a little bit about your accessory business and was that material in this last quarter. And you indicated that you are anticipating kind of maybe possibly broadening out the productlines. I was wondering if you can just give us some thoughts on what you might be expanding those productlines to include and whether or not that includes expanding the accessory business.

It is -- the accessory business is growing, but it is still not material and the reason is we are not growing the SKUs as fast as we should be because we are using third-party fulfillment and we are not happy with the service. So we anticipate that either we will have our own infrastructure or a different infrastructure to speed up increasing the SKUs that we will make available to our customer base.

And does that mean necessarily that you might take inventory in this product category then or --?

Yes.

Okay. And then what would be the types of gross margins do you anticipate if you do -- if you move forward with that?

It depends on the accessories. It's probably similar to our gross margins that we have right now.

Okay. Now also can you talk a little bit about the television creative? Is that performing to plan or do you anticipate to make any changes there?

We just made a change actually. Today, we have a new creative that started running, so we will see how that performs.

Okay. And you indicated that certainly you don't -- (inaudible) television prices do rise, you tend to cut back on advertising. It seems like this cycle might be a little bit different in that auto category seems to be -- continues to be quite strong even through -- for television and so forth. And I was just wondering if you anticipate that pricing might hold up following the election in that you might still not buy as much advertising even well into the next quarter?

Typically it tightens up. While we are getting close to the holidays, it is usually the case and when it opens up is in January. But that happens every year, so it is going to be similar comparison to prior years.

Okay. And then just to follow up on the earlier question, has the Company looked at other acquisitions or opportunities recently or is it -- I just want to know the appetite I suppose for looking at other businesses at this point.

As I said, we have a standing policy not to comment on that.

Okay. All right, that's all I had. Thank you.

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

Good morning. Just to follow up on one of the previous questions, as you look to take on some of the inventory for the accessories or other products, would you need to open up another distribution center in order to do that because I believe your current facility is fairly small? So if you are looking at another DC, what kind of costs would we be looking at?

We haven't decided yet, so I don't want to comment as far as that, but yes, it will be a separate DC in a different location.

Okay. As far as average order value, you gave the number, total number. I was wondering if you could provide us with some color in regards to AOV for new customers versus reorder customers.

Do we have that, Bruce? New customer versus -- Bruce is looking at -- I don't have it in front of me.

I just want to have a better understanding of what kind of (multiple speakers).

New customer versus reorders. Usually the new customers or average order size is lower than reorder customers, but we don't have the -- unfortunately, we don't have the math in front of us right now.

Okay, I can follow up later then. And as far as new customer acquisition costs, obviously this was pretty high for this quarter. Can you give us any sort of sense as what you expect the next couple of quarters, especially with the elections coming up over here?

We are working on being more efficient, so I would guess that it will be in the 40s, not 50s.

Okay, thank you.

Ross Taylor, CL King Company.

Hi, I guess just two or three questions. First, with regards to the accessory business, can you elaborate at all as to what categories in the accessory market you would be looking to add to your inventories and would pet food play a significant role in that?

And then my second question, I think this has been asked in various ways, but given the increase in customer acquisition costs, I mean how exactly do you think you do respond to that? How would dollars shift between TV and Internet or any other changes you anticipate?

The pet supplies and the food, the high-end food will be included in that to answer your first question. The second question was the advertising. Obviously we want to be efficient and we already shifted some dollars from television to online, which did not do as well. The creative plays a role in what the response is and we just changed the creative actually. It is running a new creative starting today. So we will see how that performs. So we will test different creatives and different media to lower the cost is the general idea I can give you.

Okay, thank you.

Mitch Bartlett, Craig-Hallum Company.

Yes, I just want to follow up on the response for the last question. Did you say you would be including food as a component of the new accessories category?

Yes, we already carry food, by the way, so if you go out to our site, you will see food, but it would be high-end food.

High end like dog food and 30-pound bags and things like that?

The higher-priced food, how about that?

Okay. That changes the business pretty dramatically. That is a very hard category to distribute, so you would have to scale up distribution facilities for something like that. You would have to spend a lot of money to get a distribution facility capable of distributing food. Is that a fair way of thinking about it or not?

Yes.

Okay, thank you.

Thank you. At this time, I would like to turn the conference call back over to Mr. Mendo Akdag. Sir, you may begin.

To average the decrease in sales for the quarter, we are focusing on advertising efficiency and shifting sales to higher-margin items while continuing to expand our product offerings. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call.

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