Petmed Express Inc (PETS) 2013 Q2 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 second fiscal quarter ended on September 30, 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 customer. 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.

Good morning. I would like to welcome everybody here today.

As 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 plied by these statements. We've 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 and thank you for joining us.

Today we will review the highlights of our financial results. We will compare our second fiscal quarter and six months, September 30, 2013 to last year's quarter and six months ended on September 30, 2012. For the second fiscal quarter ended September 30, 2013, sales were $60.5 million, compared to $58.1 million for the same period the prior year, an increase of 4%. For the six months ended on September 30, 2013, sales were $134.7 million compared to $127.1 million for the six months of the prior year, an increase of 6%.

The increases were due to increases in reorder sales for the quarter and the six months, and increases in new order sales for the six months. The average order value was approximately $73 for the quarter. Compared to $72 for the same quarter of the prior year. For the second fiscal quarter, net income was $4.2 million or $0.21 diluted per share compared to $4 million or $0.20 diluted per share for the same quarter the prior year. An increase to earnings per share of 3%.

For the six months net income was $8.9 million or $0.44 diluted per share compared to $8 million or $0.40 diluted per share a year ago. An increase to earnings per share of 12%. Reorder sales increased by 5.3% to $48.9 million for the quarter, compared to reorder sales of $46.4 million for the same quarter the prior year. For the six months, the reorder sales increased by 6.3% to $107.9 million, compared to $101.5 million for the same period last year.

New order sales were relatively flat at $11.6 million for the quarter, compared to $11.7 million for the same period the prior year. For the six months, the new order sales increased by 4.7% to $26.8 million, compared to $25.6 million for the same period last year. We acquired approximately 169,000 new customers in our second fiscal quarter, compared to 177,000 for the same period the prior year. And we acquired approximately 376,000 new customers in the six months, compared to 374,000 for the same period a year ago.

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 7.3% increase in our online sales for the quarter, compared to the same quarter last 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 second fiscal quarter, our gross profit as a percent of sales was 31.8% compared to 33.3% for the same period the prior year. And for the six months, our gross profit as a percent of sales was 32.1% compared to 32.8% for the same period a year ago. The percentage decreases can be attributed to increases in product costs and additional deep discounts given to customers.

Our general and administrative expenses as a percent of sales was 9.1% for the quarter, compared to 9.2% for the same period a year ago. And for the six months, it was 8.4% compared to 8.9% for the same period a year ago, being leveraged to G&A with increased sales.

For the quarter, we spent $7 million in advertising compared to $7.4 million for the same quarter the prior year. For the six months, we spent $17.4 million in advertising compared to $17.3 million during the same period a year ago.

The advertising cost of acquiring a customer was $41 for the quarter, compared to $42 for the same quarter the prior year. For the six months, it was $46 which was the same as the six months the prior year. We had $51.4 million in cash and short-term investments, and $17.3 million in inventory, with no debt as of September 30, 2013. Net cash from operations for the six months was $24.4 million compared to $15.7 million for the six months the prior year. The majority of the increase was due to decrease in inventory.

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

(Operator Instructions)

Kevin Ellich, Piper Jaffray.

Starting off with the gross margins being a little bit lower than we expected, you made the comments about increase in product costs and discounts. Was there any specific product that you could call out and are you expecting these costs to continue to be higher for the rest of the year? And can you talk about discounts or promotions that you guys are running at this time as well?

The product cost typically the major brand manufacturers increase their prices on an annual basis. And we typically wait till the off-peak season to pass it to the consumer. As far as promotions are concerned, we had run some aggressive promotions during the September quarter, and we will probably continue to do that in this quarter.

Got it, okay. And then on the advertising expense, it was a little bit lower than we expected in total and as a percentage of revenue. Are you still on track to hit what was in your filings for expected advertising expense for the full-year?

I doubt it that we have anything in our filings. We probably have a percent that we are showing. Probably it is going to be lower than that. Television inventory was tighter in the September quarter than what we anticipated. And that is the reason we had spent less.

Okay not a function of -- got it. Just market dynamics, understood. You continue to build up the cash balance on the balance sheet. Just wondering what you plan to do with that can you lay out your vision over the next 6, 12, 24 months or your uses of cash?

You know we are paying dividends, and we also have a stock buyback plan. I believe we have about still $10 million remaining.

About $10 million, okay. What about the competitive landscape? Have you noticed any heightened or increased competition?

I can probably say there is no -- there was no I should say material change in the competitive environment. Compared to last year.

Got it, okay, that's all I have, thank you.

Mitch Bartlett, Craig-Hallum Capital Group.

I was looking at your inventory line and it is down both quarter over quarter and year over year. Just wondering what the opportunity by environment is right now.

Our inventory will fluctuate based on the promotional buying opportunities, the low inventory means there was no advantage for us to stock up.

So what should we think about? Back to the gross margin question and modeling for the rest of the year. What should we think about as far as your ability to drive gross margins? You said promotions will continue to be somewhat aggressive in the back half of this year. And couple that with the inventory question.

We pass around product cost increases to the consumer that will happen in the December quarter. We will work on improving the gross margins and there are some opportunities and we will see where it ends up.

Specifically on gross margins, in the Q1, Q2 period seasonal flea and tick when you get into Q3 and Q4 does the pressure come off the gross margins because flea and tick was more promotional than the rest of the merchandise mix?

Yes, that is a reasonable observation on your part. There is a shift in product mix during off-peak season. That helps with the margins.

I noticed that pet source continues to expand at Pet Smart here recently, anything that you know of regulatory or otherwise that is going on in that front?

No, I don't know.

Good enough, thank you.

Erin Wilson, Merrill Lynch.

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

It is still growing double-digit at this time.

Would that be still contributing to some sort of gross margin pressure?

The gross margin is lower on pet supplies. It will little bit, yes.

Okay and then asking another question on the inventory, if they were sequentially lower and lower year over year, should we be expecting sequential build near-term?

If we pass on the promotional buying opportunities if there is an opportunity we will increase the inventory.

Okay thanks. And on capital deployment, any changes in strategy here? Should we expect any acquisitions on the table in the future or is the acquisition pipeline still just not that robust?

We don't have anything else at this time other than dividends and we do have about $10 million still remaining in our stock buyback fund.

Got it, thanks so much.

Michael Kupinski, Noble Financial.

I wanted to flesh out the heavy promotions that you had in September. I believe you had 30% off all products and I was wondering how did that influence the average order size in the quarter? For instance, without the promotions, was the average order size running? If you could just give me an idea what it was running in the first part of the quarter versus the month of September when you were really fleshing out the 30% off promotions?

We are not going to get into monthly reporting as I pointed out our average order value for the quarter was about $73. Compared to $72 for the same quarter last year.

Mendo I was not really asking for the month to month but more from the perspective of obviously with the 30% off promotion where you're seeing average order size --.

I am not going to comment on our promotions due to competitive reasons.

Okay in terms of television advertising and in the quarter obviously TV advertising, a little later than what I was expecting. Was that a function of the pricing that you were seeing in the quarter, or is it just that you cut back a little bit on the advertising?

Television inventory was tighter than what we anticipated although we offered more than what we did last year. Also, I can say that demand for OTC (inaudible) category was softer, so we were not as aggressive during the later part of the quarter.

Okay so if we look at the advertising environment going into the next quarter is inventory still remains fairly tight or are you seeing pricing? Can you give us just an outlook for the advertising environment right now?

It is really difficult to say so I am not going to speculate.

Okay in terms of your advertising budget going into next year do you anticipate that you are going to see more aggressive advertising into the next quarter? Or do you think it is going to be kind of like a little bit less than what it --?

In dollars we do have a higher budget to spend.

All right, thank you, that's all I had.

(Operator Instructions)

Ross Taylor, CL King.

I wanted to ask about the average order size. It was up a little bit year over year in the quarter and that's been the second quarter in a row that, that has occurred. What was driving some of the increases here in the September quarter? Because consistently your average order size has been down year over year for a couple years now and I just wondered what maybe changed particularly this quarter to drive it?

Combination of higher priced items and more items in an order.

Okay. And the more items in an order is that driven by success of just driving accessory purchases or is there something else at work?

Yes, we have other pet supplies that we are offering.

Okay. My last two questions relate to the prescription med business. Number one I just wondered if you could make any comments about Sentinel and whether that is coming back as you expected? And the second part of the question, I was just curious if you could make any comments about how the prescription business grew versus the OTC or the remainder of your business?

Sentinel came in the market I believe in the June quarter, so and it is doing well. The prescription business has been strong so far. But we will give the specifics at the end of the year.

Okay, good, thank you.

Anthony Lebiedzinski, Sidoti & Company.

In response to an earlier question Mendo you had mentioned that you see some opportunities within the gross margin line. Yet you are certainly going to do more promotions. I was just wondering if you could just comment on what those opportunities may be.

Passing the cost increases to the consumer is one. Reducing cost is a possibility. And we also attempt to shift sales to higher-margin items.

Like the generics and private label?

That is correct. Yes.

Okay, good. Also as far as the average order size, I know you touched on that. What do you think as far as the sustainability of the increased average order size?

It is probably real, so we will probably be able to continue to slightly improve it from the prior year.

Okay. And also just looking at prior to this quarter your G&A expenses were down five quarters in a row. However, they were up somewhat in the September quarter. So, how should we think about modeling G&A expenses going forward?

If we can grow the top line there are still some leverage in the G&A.

Okay but as far as -- in terms of dollar amounts do you expect that to go up or like I said, you had --.

It depends -- all the expenses are variable in the G&A with the sales so it will go up with sales. If the sales go up.

Okay, thank you very much.

Mitch Bartlett, Craig-Hallum Capital Group.

Yes, I just wonder if you could go back over your philosophy. It seems like you spend to a customer acquisition cost and then maybe cut it off if it starts to drift too much beyond that. What is the philosophy? You have a healthy profitability. Why not spend more aggressively?

There are two things that needs to be there. One is we advertise direct response on television, which we buy random space. And if the television inventory random space I should say inventory is not available, it is very difficult to clear the price difference is not 5% or 10%.

Okay.

Number two demand was lower for [TC] during the way the part of the quarter. So, it is not wise to spend a lot of money paying more when the demand is lower.

Why did the demand come off?

The demand was lower than what it was last year.

Because maybe they bought ahead earlier or less quarter?

It is possible, or maybe fleas is a possible too it was for.

Okay. So no need to crank up the advertising because it would materially pop.

If the environment is right we are going to -- we do have higher budgets if the environment is right, that is there is remnant space available, we will be very aggressive. If not, it is not wise to do it. It depends on the environment.

Thank you Mendo.

Now I would like to turn the call over to Mr. Mendo Akdag.

Thank you. Going forward, we are focusing on improving our gross profit margins. 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 for your participation. The call has concluded. You may disconnect at this time.