Petmed Express Inc (PETS) 2013 Q3 法說會逐字稿

Welcome to the PetMeds Express Incorporated, doing business as 1-800-PetMeds, conference call to review the financial results of the third fiscal quarter ended on December 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, on-line, 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.

Thank you. I would like to welcome everybody here today. Before I turn the call over to Menderes Akdag, 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, Menderes Akdag, President and Chief Executive Officer of 1-800-PetMeds. Menderes.

Thank you, Bruce. Welcome, everyone, thank you for joining us. Today we will review the highlights of our financial results. We'll compare our third fiscal quarter and nine months ended on December 31, 2013, to last year's quarter and nine months ended on December 31, 2012.

For the third fiscal quarter ended on December 31, 2013, sales were $50.1 million, compared to sales of $49.6 million for the same period the prior year, an increase of 1%. For the nine months ended on December 31, 2013, sales were $184.8 million compared to sales of $176.7 million for the nine months the prior year, an increase of 4.6%.

The increases were due to increases in reorder sales offset by decreases in new order sales for the quarter. The average order value for the quarter was approximately $72, compared to $71 for the same quarter the prior year.

For the third fiscal quarter, net income was relatively flat at $4.5 million or $0.23 diluted per share, compared to $4.6 million or the same $0.23 diluted per share for the same quarter the prior year. For the nine months, net income was $13.4 million or $0.67 diluted per share compared to $12.6 million or $0.63 diluted per share a year ago, an increase to earnings per share of 7.2%.

Reorder sales increased by 3.6% to $42.4 million for the quarter, compared to reorder sales of $40.9 million for the same quarter the prior year. For the nine months, the reorder sales increased by 5.5% to $150.2 million, compared to $142.4 million for the same period a year ago.

New order sales decreased by 11.5% to $7.7 million for the quarter, compared to $8.7 million for the same period the prior year. For the nine months, the new order sales slightly increased to $34.5 million compared to $34.3 million for the same period last year. The decrease for the quarter was mainly due to increase in customer acquisition costs.

We acquired approximately 114,000 new customers in our third fiscal quarter, compared to 131,000 for the same period the prior year. And we acquired approximately 490,000 new customers in the nine months compared to 504,000 for the same period a year ago. For the quarter, approximately 79% of our sales were generated on our website compared to 78% for the same quarter last year, which resulted in a 2.1% increase in our on-line 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 seasons.

For the third fiscal quarter our gross profit as a percent of sales was 33.7%, compared to 34.7% for the same period a year ago. For the nine months, our gross profit as a percent of sales was 32.6% compared to 33.3% for the nine months a year ago. The percentage decreases can be attributed to increases in product costs and additional discounts given to customers.

Our general and administrative expenses as a percent of sales was 10.2% for the quarter, compared to 10.4% for the same period a year ago. For the nine months it was 8.9% compared to 9.3% for the same period a year ago. We leveraged the G&A with increased sales.

For the quarter, we spent $4.5 million in advertising, compared to $4.6 million for the same quarter the prior year. For the nine months, we spent $21.9 million for advertising, which was the same as the nine months the prior year.

Advertising costs of acquiring a customer for the quarter was $40 compared to $35 for the same quarter the prior year. And for the nine months, it was $45 compared to $43 for the same period a year ago. The increase for the quarter was due to higher costs and softer demand.

We had $41.5 million in cash and short-term investments and $24.5 million in inventory with no debt as of December 31, 2013. Net cash from operations for the nine months was $17.7 million compared to $21.8 million for the nine months the prior year. The reduction was mainly due to a reduction in accounts payable and an increase in prepaid expenses.

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

(Operator Instructions)

Kevin Ellich from Piper Jaffray, you may ask your question.

Hi, this is actually Brad on for Kevin.

Hi, Brad.

Hi. Can you talk a little bit about, or go into a little bit more detail on what's driving the higher cost to acquire new customers? It seems to be a pretty big jump year over year.

Our cost per impression was higher. Blended is probably double-digits and mid-teens. That was the main reason. Also, the demand was soft for the flea and tick topicals.

Okay. And then can you talk a little bit about what you're seeing in the advertising market? It was a little bit lower than what we were expecting. Can you help us think about your budget for next quarter and then into fiscal year FY15?

For our cost per impression was much higher for television in the December quarter. It will probably carry it appears, to the March quarter, but it's difficult really to tell. The weather is going to play a role, too, especially in the month of March.

Okay. And then just quickly, I noticed the tax rate was quite a bit lower than the previous year. Anything in there that we should make note of?

There was a true-up of the last fiscal year's tax return, and there was slight gain.

And then lastly, I noticed inventories ticked up sequentially. Is that primarily due to promotional buying opportunities that you guys are taking advantage of? Or is there something else going on?

Yes, it is based on promotional buying opportunities. When there's a cost advantage, we'll carry higher inventory.

Great. Thank you.

You're welcome.

Our next question comes from Anthony Lebiedzinski from Sidoti & Company.

Yes, good morning. This is Anthony Lebiedzinski. Just following up on the previous question, as far as the weather impact, can you talk about, have you seen anything? A lot of retailers have spoken about the weather impact being colder than usual. Has that been an issue so far that you can tell?

Demand was soft for the flea and tick topicals this December quarter compared to last year. So we think colder weather might have impacted it.

Okay. And also, as far as the advertising spending is concerned, is there a notable effect that you expect from the Winter Olympics?

It could impact the viewership of the stations that are not showing the Olympics. But other than that, we're not anticipating a significant impact. It's also our off-peak season, and we don't spend as much as we spend on our peak season.

Got it. And also, I was wondering if you have any comments as to your distribution facility is concerned. I know the lease expires next May. Have you made any definitive plans whether to move? Just wanted to get a better sense of how you're thinking about this over the next year or so.

It is likely that we will move the distribution center, but we did not make a definitive decision yet. The move will take place in the next fiscal year, if we decide to do it.

Okay, Thank you.

You're welcome.

(Operator Instructions)

Mitch Bartlett, your line is open.

I wonder, Menderes, if you could go through, the gross margins were down 100 basis points, but private label continues. It's my assumption private label continues to grow as a percentage of the mix. Maybe you could help with us those numbers, tell us how much private label is, how much it contributes to gross margin. So we can understand the pricing pressure on the rest of the business.

I'm not going to get into specific data points, but I can tell you that actually generic sales were down compared to last year in the December quarter, which negatively impacted the gross profit margin. But the main impact was really additional discounts given to customers.

Got it. And why would they be down? Haven't you expanded the number of SKUs that are available in private label?

We did. As I told you, demand was soft on flea and tick topicals.

Right.

So we think generic users are less compliant than brand users.

Okay. And then my second question would be, last quarter, over the last several years you have talked about investing more in new customer growth. But the environment tends to be somewhat prohibitive for that. At what point do you use price as the leverage to drive customer growth? Or do you not even consider that?

We will consider it if the demand is high, and we will consider it in our peak season. So maybe next peak season we'll surprise you.

Okay. You might change the strategy a little bit and go after customers?

Yes, we are going to attempt to grow new order sales, and we'll see what happens.

And in the quarter ahead, all that new inventory, does that bode well for gross margins? Or too hard to say?

It is difficult to say. Our pricing has to be competitive in the marketplace. Market is dictating the major brand pricing.

Right. Mostly it's my impression, maybe right or wrong, that when you do these opportunity buys, it's mainly flea and tick. Is that a fair assumption?

Not necessarily, no, but flea and tick is a major portion of our business.

Thank you for the help.

You're welcome.

I would like to turn it back over to Menderes for closing remarks.

Thank you. Going forward we are focusing on improving gross profit margins and new order sales. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call.

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