Petmed Express Inc (PETS) 2012 Q4 法說會逐字稿

Welcome to the PetMed Express Incorporated, doing business as 1-800-PetMeds, conference call to review the financial results for the fourth fiscal quarter and fiscal year ended on March 31, 2013. 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 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 call over to the Company's Chief Financial Officer, Mr. Bruce Rosenbloom.

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 under the meaning of the Private Securities Litigation Reform Act of 1995 or in 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'll compare our fourth fiscal quarter and fiscal year ended on March 31, 2013 to last year's quarter and fiscal year ended on March 31, 2012. For the fourth fiscal quarter, ended on March 31, 2013, our sales were $51.1 million, compared to sales of $55.9 million for the same period the prior year, a decrease of 8.6%. For the fiscal year ended on March 31, 2013, sales were $227.8 million compared to $238.3 million for the prior fiscal year, a decrease of 4.4%.

The sales for the quarter were negatively impacted by the colder than normal weather compared to the warmer than normal weather for the same quarter last year. Non available to Novartis brands, negatively impacted our sales for the fiscal year. Also our average order was approximately $75 for the quarter compared to $76 for the same quarter of the prior year. It was $73 for the fiscal year compared to $76 for the prior fiscal year. The decline was due to change in product mix to lower priced items, including generics and additional discounts given to customers.

For the fourth fiscal quarter net income was $4.6 million or $0.23 diluted per share compared to $4 million or $0.20 per diluted per share for the same quarter of the prior year, a 16.5% increase in earnings per share. For the fiscal year, net income was $17.2 million or $0.86 diluted per share compared to $16.7 million or $0.80 diluted per share a year ago, an increase to earnings per share of 6.4%. The increase to net income was primarily due to decreases in operating expenses offset by decreases in gross profit.

New order sales decreased by 24% to $8.7 million for the quarter compared to $11.5 million for the same period the prior year. For the fiscal year, new order sales decreased by 16% to $43 million compared to $51.3 million for the prior year. The decreases were mainly due to reduction in advertising spending and average order value. Reorder sales decreased by 4.5% to $42.4 million for the quarter compared to reorder sales of $44.4 million for the same quarter of the prior year. The colder weather negatively impacted the quarter. For the fiscal year reorder sales decreased by 1.2% to $184.8 million compared to $187 million for the prior year.

We acquired approximately 125,000 new customers in our fourth fiscal quarter compared to 162,000 for the same period the prior year. We acquired approximately 630,000 new customers in the fiscal year compared to 722,000 for the prior year. For the quarter approximately 79% of our sales were generated on our website compared to 76% for the same period the prior year. For the year it was 77% compared to 75% for the prior year. The seasonality in our business is due to the proportion of flea, tick and heartworm medication in our product mix. Spring and summer are considered peak seasons with fall and winter being the off seasons.

For the fourth fiscal quarter, our gross profit as a percent of sales was 35.7% compared to 33.9% for the same period a year ago. For the fiscal year our gross profit as a percent of sales was 33.9% compared to 33.7% for the prior year. The percentage increase for the quarter can be mainly attributed to change in product mix to higher margin items including generics. Our general and administrative expenses as a percent of sales were 10.1% for the quarter compared to 9.7% for the same quarter the prior year. The increase was due to reduction in sales. For the fiscal year the G&A was relatively flat at 9.5% compared to 9.4% for the prior year.

For the quarter we spent $5.6 million in advertising compared to $6.9 million for the same quarter the prior year, a decrease of about 20%. The decrease was mainly due to lower demand for the flea and tick category as a result of the colder weather. For the fiscal year we spent $27.4 million for advertising compared to $30.4 million for the prior fiscal year, a decrease of about 10%. The 2012 elections negatively impacted the spending for the fiscal year by crowding the TV advertising market. Advertising cost for acquiring a customer for the quarter was approximately $44 compared to $43 for the same quarter the prior year. For the fiscal year it was $44 compared to $42 for the prior fiscal year.

We had $33.6 million in cash and temporary investments and $31.6 million in inventory with no debt as of March 31, 2013. The inventory increase was due to promotional buying opportunities and lower than anticipated sales. Net cash from operations for the fiscal year was $13.3 million. Capital expenditures for the fiscal year were $626,000. In accordance with our share repurchase program, we repurchased approximately 397,000 shares paying approximately $3.9 million in the fiscal year. There were no repurchases during the quarter.

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

(Operator Instructions)

Kevin Ellich, Piper Jaffray.

First of all, Mendo, wondering if you could give us a little bit more color on the inventory comment, we noticed there was a pretty big uptick this quarter in terms of uses of cash. Was there any specific product or promotion that you can call out? What's your confidence in unwinding some of that inventory you stocked up?

We are not going to give any specifics, due to competitive reasons, but our inventory does fluctuate based on the promotional buying opportunities. In the current quarter, it's probably about a two months supply, so it's not difficult to reduce it down.

Okay. That's helpful. Then, just going back to advertising costs and even what you said in the press release, talking about focusing on increasing your advertising spend to drive new order sales, do you have a target in mind in terms of how much you plan to spend this year? What type of growth you'd like to see, or actual number of new customers you'd like to see this year? Anything you could do to provide some help there would be useful?

Our advertising budget this current fiscal year is considerably higher than last year's. So, we're planning on spending a lot more than we did last year.

Okay. Is that primarily focused on TV still, or is it more of a combination between online and TV?

It's a combination.

Okay. That's helpful. We know Novartis is back in the market. Just wondering how that's going to affect your revenues and product mix on a go-forward basis?

It should positively impact it. We got really negatively impacted last year, so it should be a positive this year.

Okay. Gross margins were pretty strong this quarter. Are we seeing a greater mix shift towards more generic products? Could you provide some color on what's driving this big gross margin improvement?

A combination of generics and higher margin items, which are in the same categories.

Okay. Thank you.

Erin Wilson, Banc of America.

You mentioned weather in the press releases, al well as generics and some other factors that impacted revenues. Can you quantify those factors for us?

As far as the weather is concerned, for the quarter, the temperatures were about 12 degrees colder than average compared to last year, it was 12 degrees warmer than average. There was a 24 degrees difference in the temperature between this year's March quarter compared to last year. What was your other question?

I wanted to know in dollar terms how the weather impacted the business?

We spent much less in advertising. With advertising drives our revenues, so with that we spent about 20% less in advertising. Obviously, that dramatically impacts the new order sales and somewhat also reorder sales. It's difficult to be more specific than that.

Okay. Obviously, Novartis is going to have a positive impact on the top line, but how should we think about the impact of the reintroduction of its products, or some of its products, from a profitability standpoint?

They have favorable margins.

Okay. What is your generic dispensing rate right now? Where do you expect that to be by the end of the year?

I'm sorry, what dispensing rates?

Generic.

Oh, generic dispensing rate? We're not going to disclose that information.

Okay. All right. Thank you.

Anthony Lebiedzinski, Sidoti & Company.

Just wondering about the average order value, have you seen any notable difference between new orders and reorders?

New orders are always less than reorders. There's about a $5, $6 difference. I know I keep getting that question, but it's about $5, $6 lower new order average, order value compared to reorders.

Okay. And has that trend been consistent throughout the past -- ?

Fairly consistent, yes.

So no notable changes? Okay.

That is correct.

Okay. Good. Just wondering if, just my observation, but is it correct that you're going to hold off with your share buyback until you rebuild back your cash position? Is that a fair way to think about that?

We have a pretty good cash position as is. $33.6 million in cash and temporary investments. That should not impact what we do with the buyback.

Okay. All right. Thanks very much.

Ross Taylor, CL King.

Just two or three quick questions. First, with regards to the negative impact on your business from the cold weather in the March quarter, do you think you are able to make up for much of that in the June quarter? Or, do you view a loss sale as something that's gone even if it's related to the weather?

We certainly hope so. The season started late this year. Last year, the season started early, so it's really a mismatch. So far this quarter we have positive growth, so we're cautiously optimistic.

Okay. Also related to the Novartis products, just trying to estimate better what the impact may be if they are returned to the market. Do you have much of a sense, or can you estimate how many of the Novartis customers never switched to a competitive product and may come back to say the Sensible brand very quickly?

Well, we have some estimates, but we're speculating so I'm not going to share that with you. But it's had a significant negative impact in the last fiscal year, so some of the brands are back. All of the brands are not back. We'll see how it shapes up.

All right. My last question, related to some of the generic flea and tick products, can you comment how successful your own private label brand has been, the Flea4X? Or, can you comment which of the generic products have been among the most popular within your product mix?

We're not going to get into specifics but I can tell you that our brand has been successful.

Okay. All right. That's all my questions. Thank you.

Michael Kupinski, Noble Financial.

I just had a quick question in terms of how sales of accessories were in the quarter? What we are experiencing in those product lines?

We are experiencing growth in accessories, but we're not going to get into the specifics.

Okay. I noticed that you changed your creative, maybe -- a couple times in the last quarter. Can you talk about how the new creative is performing in the market? Are you getting some traction there?

The current quarter is performing well.

You say that you're planning on spending more on the advertising. Can you talk about advertising rates and how much are they up year over year?

It's slightly higher. The rates are slightly higher compared to last year. Conversion and response rate plays just as much of a role as the rate.

Are you seeing growth in the response rates with the new creative?

It's doing slightly better than at the last year at this time.

Okay. As we look toward the heightened flea and tick season, I'm just curious, does other components of weather affect the strength of flea and tick? For instance, does wet weather also affect buying?

Yes it does. Wet weather really helps -- I shouldn't say help, but fleas like the wet weathers.

So, actually wet weather does -- it actually benefits, not the other way?

That is correct.

Perfect. That's all I have. Thank you.

(Operator Instructions)

Mitch Bartlett, Craig Hallum.

Just wanted to bore down a little bit on the new customer performance in this last quarter. You said you acquired customers at $44, a little bit higher than it was a year ago, but you spent 20% less. As we go into the next year and you're going to ramp up that spending budget, just a question, is it harder to get a new customer going forward than it has been in the past? Perhaps you spent to a level that cleared the $44 level and then no further. If you ramp it up, what would be the cost-of-customer acquisition going forward?

Then, similar question is, I noticed some of your online competitors have really ramped up the price of competitiveness here recently, Doctors Foster and Smith particularly. Are you going to change pricing strategy or do anything? I know you're relying on the generics, but overall, just a price strategy question?

We survey the market all the time and we believe we are highly competitive price wise. As far as the March quarter is concerned, as we pointed out, due to colder weather, the demand was low. So, that's why the response was low to our advertising. That doesn't necessarily mean that that's going to continue to the future.

So, you think perhaps we'll see customer acquisition costs similar to what you've done in previous years or -- ?

You're talking about the -- ? As you know, it fluctuates from quarter to quarter.

Yes. Overall, if you looked at the year, nonpolitical year versus a political year, et cetera?

It should be favorable. The comparison is favorable obviously to us. We'll see how it shapes out.

Okay. Just a quick question on VetSource and Wag.com and that kind of competitive situation, how do you view that?

There are some regulatory hurdles to the Wag.com med-source partnership. There are anti kickback and anti fee splitting regulations. It remains to be seen if it survives regulatory scrutiny, but we have not heard much from our customers at this time regarding their launch.

Has there been any regulatory action that you know of?

Not at this time, I don't know.

Fair enough. Thank you.

Erin Wilson, Banc of America.

On VetSource, just a follow up to that question, don't you have some relationships as well with veterinary clinics that may fall under that sort of regulatory scrutiny as well?

No, we don't.

Okay. Also Virbac had a small recall of Iverhart recently, do you anticipate that having a meaningful impact on your business?

No. We don't think so.

Okay. Do you anticipate also achieving or adjusting maybe your strategy on supplies and accessories from a distribution standpoint?

We will in the long run, yes.

Any details on that or -- ?

Not at this time.

Okay. All right. Thanks.

I will now turn the call back to Mendo for closing remarks.

Thank you. Going forward, we are focusing on increasing advertising spending to improve new order sales 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 now disconnect.