Petmed Express Inc (PETS) 2013 Q1 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 first fiscal quarter ended on June 30, 2013. At the request of the Company, this conference Call is being recorded.

Founded in 1996, 1-800-petMeds is Americas largest pet pharmacy, delivering prescription and non-prescription 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 PetMeds 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 events to be materially different from future results, performance or achievements expressed or implied by these statements. We've identified their 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. This morning, we will review the highlights of our financial results. We'll compare our first fiscal quarter ended on June 30, 2013 to last year's quarter, ended on June 30, 2012.

For the first fiscal quarter ended on June 30, 2013, our sales were $74.2 million, compared to sales of $69 million for the same period the prior year, an increase of 7.6%. The increase was due to increases in new order and reorder sales. Our average order was approximately $77 for the quarter, compared to $73 for the same quarter the prior year. The increase was due to a favorable reaction to promotions.

For the first fiscal quarter, net income was $4.8 million, or $0.24 diluted per share, compared to $4 million or $0.20 diluted per share for the same quarter last year, an increase to earnings per share of 22%. Reorder sales increased by 7.1% to $59 million for the quarter, compared to reorder sales of $55.1 million for the same quarter the prior year. New order sales increased by 9.6% to $15.2 million for the quarter, compared to $13.9 million for the same quarter the prior year. The increase was mainly due to an increase in advertising spending, and increase in average order size.

We acquired approximately 207,000 new customers in our first fiscal quarter compared to 197,000 for the same period the prior year. Approximately 79% of our sales were generated on our website for the quarter, compared to 77% for the same period the prior year, which resulted in a 10.6% increase in our online sales.

The seasonality in our business is due to the proportion of flea, tick, and heartworm medicine 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 flat at 32.4%, compared to the same period a year ago. Our general and administrative expenses as a percent of sales was 7.9% for the first fiscal quarter, compared to 8.6% for the same quarter the prior year. We leveraged the G&A with increased sales.

We spent $10.4 million in advertising for the quarter, compared to $9.8 million for the same quarter the prior year, an increase of 5.5%. The advertising cost of acquiring a customer was the same $50 for the quarter, compared to the same quarter the prior year.

We had $50.5 million in cash and short-term investments, and $21.6 million in inventory, with no debt as of June 30, 2013. Net cash from operations for the quarter was $19.8 million.

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

(Operator Instructions)

The first question comes from Kevin Ellich of Piper Jaffrey.

This is actually Brad on for Kevin. My first question, average order size was pretty strong this quarter. Can you provide a little bit more color on the promotions that were driving that strength this quarter?

The consumer purchased additional items at larger quantities. Also there were some shift to higher-priced items. That was the reason for the increase in the average order.

Okay, and then in the press release, you mentioned you're going to focus on improving your advertising efficiency for the remainder of fiscal year 2014. Can you just talk a little bit about what worked well this quarter, maybe what didn't work so well this quarter, and how you plan on improving that efficiency in the remainder of the year?

We had a greater exposure on TV in the June quarter, and we paid a little bit more per impression to be able to do that. And our acquisition cost was flat at $50, so we like to improve that a little bit. But with the average order value higher, obviously we could afford that.

Okay, and then you mentioned G&A was lower due to leverage, but I guess was there anything else you did on that cost line to get that number lower?

Share-based compensation decreased by approximately $190,000, comparing the two quarters.

Okay, thank you.

Your next question comes from Michael Kupinski, Noble Financial.

Great quarter. Was wondering if you could chat a little bit about, did we get a benefit from the Novartis heartworm medication starting coming back online in the quarter?

Yes, we did.

Can you quantify that impact, Mendo?

I would hesitate to do that since they have not been available over a year. It's difficult to quantify the net impact.

Okay and can you talk about the current television advertising environment? Availability for remnant television and pricing? And you talked a little bit about the advertising mix, what was the advertising like digital, e-mail, internet, versus television in the quarter?

We increased our television exposure in the June quarter and it's likely going to continue in the near future.

And what is the current environment for television advertising? Are you seeing good availability for remnant television, and what is the pricing looking like at this point?

Prices usually come down in the Summer months, but that's similar to last year.

Okay, and then was flea and tick revenues higher as a percentage of revenues this year than last year?

No.

Okay, and then in terms of Wal-Mart seeming to have a soft launch in getting into the prescription pet medications market, have you seen competitive issues relating to the Company's margin? Can you talk a little bit about competitive pricing for some of the more popular pet medications -- prescription medications?

We are not coming across them so far.

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

Your next question comes from Ross Taylor, CL King.

Two questions. With regards to the average order size, do you anticipate the promotions you did during the quarter may continue over the next few quarters? Do you continue to see this kind of benefit on the average order size?

And then the second question I have just relates to the gross profit margin. It was basically flat year-over-year, given some of the momentum you had in gross profits the last couple of quarters. I would have thought maybe that could have improved a little bit again this year, but just wondered if some of those promotions held back to gross margins this quarter?

As far as average order value, we're going to attempt to continue to increase it. The gross margins, the reason it didn't improve is, we used the gains from some of the shift to generics to discount some of the major brands.

Is that something you expect probably continues as well?

The market decides that, so if we have to, yes, we will. If we don't have to, we don't have to, so it depends on the market pricing.

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

(Operator Instructions)

Your next question comes from Anthony Lebiedzinski of Sidoti & Company.

I was wondering if you could discuss the overall trends that you're seeing in the sales of prescription medications, generics, over-the-counter? So if you could give us a little bit more color as of what you saw in the quarter, and your expectation going forward?

Prescription medications were healthy, so we saw a nice growth and we're anticipating that it's going to continue.

And as far as generics, I know that's something you've had some success with. Can you give us a little bit more color as to your penetration levels there, and where you see that going forward?

You're asking about prescriptions?

Well, generics all together.

All together? There was a nice growth on generics in the June quarter, but we're not going to give specific data points.

And your comment in your press release about continuing to expand your product offerings, can you give us some color on that topic, please?

We have increased it quite a bit so far, but it's not just pet supplies, also, we're increasing pet health products.

Okay, thank you.

Your next question comes from Erin Wilson, Bank of America.

Just real quickly on the supplies business, can you break out at least anecdotally how much that contributed in the quarter? And is that still a key initiative for you?

Pet supplies were actually relatively flat in the June quarter, compared to the last year, so it didn't have much of an impact as far as the revenue increase is concerned.

Okay, and what percentage of total sales would that be?

We're not going to disclose that.

Okay, and then just a broad question. The majority of pet medications are still dispensed through the vet clinic. Do you expect the e-commerce online channel, do you think it's gaining share overall? Where do we expect to see that market share stand, or where does it stand currently, and where should it go over the next few years?

It's probably -- the online channel is about 12% to 13% of the market is our guesstimate at this time. It should grow, I would guess, at about 1% a year.

Okay, and then anything you're watching in particular on the regulatory front?

No.

Okay, thank you.

Your next question comes from Mitch Bartlett, Craig-Hallum.

This is George Kelly on for Mitch. Couple questions. First, the weather has been so kind of odd so far this year, and I believe it was a benefit in the quarter. Can you talk about what you expect for the September quarter, and how the weather will impact that?

I believe the weather is hot so that's good news for us, so we'll see how the quarter progresses.

Okay, and then as a follow-up to a previous question, the pet health products that you're expanding in, can you talk a little bit more there and give more detail what kind of products and how big is the offering right now?

Similar products that we carried in the past, we are just adding more varieties and there are new products also coming into the markets that we start carrying.

Okay, and then lastly on the regulatory front, you've talked before about the Wag and VetSource, the prescription stuff. Is there any update there with their model?

No, I have no additional comments on it.

Thank you.

I will now turn the meeting back to Mr. Akdag for closing remarks.

Thank you. Going forward, we are focusing on improving advertising efficiency and 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. Once again, this does conclude today's conference. Thank you for attending. You may disconnect at this time.