Petmed Express Inc (PETS) 2012 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 and six month ended on September 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 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. 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, the President and Chief Executive Officer of 1-800-PetMeds. Mendo?

Thank you, Bruce. Welcome, everybody. Thank you for joining us. Today we will review the highlights of our financial results. We will compare our at second fiscal quarter and six months ended on September 30, 2012 to last year's quarter and six months ended on September 30, 2011.

For the second fiscal quarter ended on September 30, 2012, sales were relatively flat at $58.1 million compared to sales of $58.2 million for the same period the prior year. For the six months ended on September 30, 2012, sales were $127.1 million compared to $131.8 million for the six months the prior year, a decrease of 3.6%.

The sales stabilized for the quarter even though the average order value was about 5% lower at $72 compared to $76 for the same quarter the prior year. The decrease in average order value was due to additional discounts given and a change in product mix to lower-priced items mainly generics. Also the unavailability of Novartis brands continued to negatively impact our sales.

For the second fiscal quarter, net income was $4 million or $0.20 diluted per share compared to $3.9 million or $0.19 diluted per share for the same quarter the prior year, an increase to earnings per share of 6%. For the six months, net income was $8 million or $0.40 diluted per share compared to $8.8 million or $0.41 diluted per share a year ago, a decrease to earnings per share of 4%.

The increase for the quarter was due to a decrease in operating expenses and the decrease for the six months was mainly due to lower sales in the June quarter.

Reorder sales increased by 2.1% to $46.4 million for the quarter compared to reorder sales of $45.5 million for the same quarter the prior year. For the six months, the reorder sales slightly decreased to $101.5 million compared to $102.1 million for the same period last year.

New order sales decreased by 8.1% to $11.7 million for the quarter compared to $12.7 million for the same period last year. For the six months, the new order sales decreased by 13.8% to $25.6 million compared to $29.7 million for the same period last year. The decreases were mainly due to reduction in advertising and decreases in average order value.

We acquired approximately 177,000 new customers in our second fiscal quarter, compared to 184,000 for the same period the prior year and we acquired approximately 374,000 new customers in the six months compared to 410,000 for the same period a year ago.

Approximately 77% of our sales were generated on our website for the quarter compared to 74% for the same period the prior year, which resulted in a 2.9% increase to our online sales for the quarter compared to the same quarter last year.

The seasonality in our business is due to the proportion of fleet, 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 second fiscal quarter, our gross profit as a percent of sales was 33.3% compared to 34.2% for the same period the prior year and for the six months, our gross profit as a percent of sales was 32.8% compared to 33.4% for the same period a year ago. The percentage decreases can be attributed to increases in freight costs through improved service levels.

Our general and administrative expenses as a percent of sales improved to 9.2% for the quarter compared to 9.6% for the same period a year ago and for the six months it was 8.9%, which was the same as the six months the prior year.

For the quarter, we spent $7.4 million in advertising compared to $7.9 million for the same quarter the prior year. The reduction of advertising for the quarter was due to the unavailability of TV [random] space inventory. For the six months we spent $17.3 million in advertising compared to $18 million during the same period a year ago.

The advertising cost of acquiring a customer improved to $42 for the quarter compared to $43 for the same quarter the prior year. For the six months, it was $46 compared to $44 for the same period a year ago.

We had $47 million in cash and cash equivalents, $15.4 million in short-term investments, and $19.6 million in inventory with no debt as of September 30, 2012. Net cash from operations for the six months was $15.7 million. Capital expenditures for the six months were approximately $290,000.

In accordance with our share repurchase program, we repurchased approximately 397,000 shares, paying approximately $3.9 million during the quarter at an average price of $9.74.

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

(Operator Instructions). Kevin Ellich, Piper Jaffray.

Good morning, guys. Just a couple questions. I guess first of all, Mendo, good morning. You mentioned the unavailability of TV advertising random space this quarter. Are you still seeing that impact or have things started to open up?

We are still seeing the impact and we expect to see it until November 6.

Until after--. So it's really due to the election. So is it safe to assume that we should be looking at advertising expenditures be -- you know, lower on a year-over-year basis than what we saw this quarter?

Probably yes.

Okay, then you also mentioned the discounts that impacted this quarter. Are you still offering any discount programs?

Yes, we are, but right now it's similar to what we did last year.

Got it, got it. Do you have any update or thought on when Novartis might be back online? We've heard maybe by the end of the year but it seems to be -- it seems like there's some conflicting information out there.

The latest information we have is the beginning of 2013.

Beginning of 2013, okay, got it. Last question here it looks like Bruce, maybe on the cash flow statement, we saw some investments. Just wondering if there is anything you can talk about on that front?

We did invest additional cash into some short-term investments. We have held those short-term investments for a few years now and we just upped our balance from about $10 million to about $15 million.

Got it, okay. Can you remind is where the buyback authorization is? Is it around $10 million now?

About $10 million remaining, yes.

Okay, got it. Thanks, guys.

Erin Wilson, Bank of America Merrill Lynch.

Can you give us an update on the supplies and accessories business and how that is progressing?

It is increasing, but we are not going to get into the specifics.

Okay, and then I guess I understand it is an inherently lower margin business, but are there ways to improve the profitability for that segment and are you still considering switching from your third-party fulfillment strategy?

We are still using third-party fulfillment. As far as profitability is concerned, that depends on the product mix. And we will only really carry it if it adds value and loyalty to our customer base -- increase loyalty, I should say.

Okay, and then I'm curious what your thoughts were on the FTC discussion a few weeks ago. Did you expect or do you expect I guess a follow-up to that with some sort of broader investigation or legislation?

We are not going to speculate on what FTC may or may not do. If and when they take any action, we can talk about it.

Okay, thanks.

Michael Kupinski, Noble Financial.

Thanks for taking the question. On the pet accessories, are you still planning on carrying inventory of pet accessories at this point? And I just wanted to follow up on that one question there.

We are currently using third-party fulfillment. If that changes, we will let you know.

Okay. Did you notice any difference in the competitive landscape in the quarter particularly for flea and tick?

No, it was similar to last year.

Okay, then could you identify the revenue impact from the Novartis plant closings in the quarter? What would you say was the revenue impact?

Our rough estimate is about $2 million.

Okay, then just some housekeeping items. The depreciation and amortization was a little lower. Is that a good run rate going forward or was there any particular reason for that to be down in the quarter? For my estimate at least?

Right, there has been a reduction in capital expenditures and that is the reason it has been down. It depends on if we make any major capital expenditure spending. At this time we are not planning on it but if we do, we will let you know.

If you can just remind me, prospect for capital expenditures, is that for updating the warehouse that you have in Pompano or what would be the reason why you would have an increase in CapEx?

The distribution center is one possibility. The other possibility is a change in our systems and software.

Okay, all right, thank you. That's all I had.

Anthony Lebiedzinski, Sidoti & Company.

Good morning, a couple questions. So first, are you still seeing more customers ordering three packs versus six packs for example of flea and tick products? I know her you mentioned this on your previous calls.

It was in the September quarter, it was similar to the same quarter last year.

Okay, and your G&A costs were down a little bit more so than what we had expected. Is there anything -- I know there is some seasonality in the expenses. Just wondering if perhaps you cut back on certain incentives -- compensation expenses or anything else that we should think about?

It was credit card processing fees, professional fees, and a slight decrease in payroll were the three that caused the reduction.

Okay, thank you very much.

(Operator Instructions). Mitch Bartlett, Craig-Hallum Company.

Thank you. Just wondering if you could characterize kind of the pharmacy and the nonprescription side of the business. What is the trends on those two sides of the business broadly?

Actually in the September quarter, the OTC was -- went up and Rx went down slightly, but the main reason is the unavailability of the Novartis brands.

And the strength in the OTC, is that new creative? What are you doing to see that kind of response after a couple of years where it has been a little rocky?

Generics and being more aggressive offering more discounts.

And the generics, what do you think that contributed to the decline in the AOV? How did that look?

We are not going to comment on that.

Okay, thank you.

Ross Taylor, CL King.

Yes, my first question just has to do with some of your generic offerings or your initiatives on that side. Has the generic products and particularly the Flea 4X, have they progressed as you expected as a percent of your sales mix?

Yes, we are cautiously optimistic with it but other than that we're not going to get into any specific data points.

My second question, your customer acquisition costs were down a little bit year-over-year and certainly down a lot from what you had in the June quarter. You are able to potentially increase your TV advertising once you get past the election. Is that likely to boost your customer acquisition costs materially or how might you manage that?

We were more efficient in the September quarter compared to the June quarter. In the June quarter, we forced it and that's never a good idea and we stuck to the fundamentals in the September quarter and took what was there and we intend to continue to do that.

Okay and my final question is just trying to get a sense as to how the mild winter maybe has affected the flea and tick business over the first nine months of this year. I just wonder if you had any sense if in the September quarter the mix of flea and tick sales if you adjust for the Novartis was kind of where it might normally be and whether you just see any evidence that maybe a lot of business was pulled forward into the March quarter from June?

That is correct, it was stronger, the flea business was stronger in the September quarter. And as you know, the March quarter was strong and the June quarter was weak, probably there were some revenue shifts from June to March.

Okay, that's helpful. Thanks very much.

And now I would like to turn the call back over to Mendo Akdag. And sir, you may begin.

Thank you. Going forward, 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. That does conclude today's conference call. You may disconnect at this time.