Petmed Express Inc (PETS) 2013 Q4 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 fourth fiscal quarter and fiscal year ended on March 31, 2014. At the request of the Company, this conference is being recorded. Founded in 1996, 1-800-PetMeds is America's largest pet pharmacy, delivering prescription and non-prescription pet medications and other health products for dogs and cats, delivered 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 or aim to increase the recognition of 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. You may begin, sir.

Thank you. I would like to welcome everybody here today. Before I turn the call over to Menderes 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, 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 fourth fiscal quarter and fiscal year ended on March 31, 2014, to last year's quarter and fiscal year ended on March 31, 2013.

For the fourth fiscal quarter ended on March 31, 2014, our sales were $48.6 million, compared to sales of $51.1 million for the same period the prior year, a decrease of 4.9%. For the fiscal year ended on March 31, 2014, sales were $233.4 million, compared to $227.8 million for the prior fiscal year, an increase of 2.4%. The sales for the quarter were negatively impacted by the cold and difficult weather conditions. The average order was approximately $77 for the quarter, compared to $75 for the same quarter the prior year. It was $75 for the fiscal year, compared to $73 for the prior fiscal year. The increase in average order value was mainly due to a change in product mix to higher-priced items.

For the fourth fiscal quarter, net income was relatively flat at $4.5 million, or $0.23 diluted per share, compared to $4.6 million, or $0.23 diluted per share, for the same quarter the prior year. For the fiscal year, net income was $18 million, or $0.90 diluted per share, compared to $17.2 million, or $0.86 diluted per share a year ago, an increase to earnings per share of 4.7%. Reorder sales decreased by 3.4% to $41 million for the quarter, compared to reorder sales of $42.4 million for the same quarter the prior year. The cold weather negatively impacted the quarter.

For the fiscal year, reorder sales increased by 3.5% to $191.2 million, compared to $184.8 million for the prior year. New order sales decreased by 11% to $7.7 million for the quarter, compared to $8.7 million for the same period the prior year. For the fiscal year, new order sales decreased by 1.9% to $42.2 million, compared to $43 million for the prior year. The decrease for the quarter was mainly due to an increase in customer acquisition costs.

We acquired approximately 107,000 new customers in our fourth fiscal quarter, compared to 125,000 for the same period the prior year. We acquired approximately 597,000 new customers in the fiscal year, compared to 630,000 for the prior year. For the quarter, approximately 80% of our sales were generated on our website, compared to 79% for the same period the prior year. For the year, it was 79%, compared to 77% for the prior 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 fourth fiscal quarter, our gross profit as a percent of sales improved to 35.9%, compared to 35.7% for the same period a year ago. For the fiscal year, our gross profit as a percent of sales was 33.3%, compared to 33.9% for the prior year. The percentage increase for the quarter was mainly due to a cost reduction in certain brands. The percentage decrease for the fiscal year can be attributed to increases in product costs and additional discounts given to customers.

Our general and administrative expenses as a percent of sales were 10% for the quarter, compared to 10.1% for the same quarter the prior year. For the fiscal year, the G&A was at 9.2%, compared to 9.5% for the prior year. We were able to leverage the G&A.

For the quarter, we spent $5.3 million in advertising, compared to $5.6 million for the same quarter the prior year, a decrease of about 5%. For the fiscal year, our spending was relatively flat at $27.2 million for advertising, compared to $27.4 million for the prior fiscal year. Advertising cost to acquiring a customer for the quarter was approximately $49, compared to $44 for the same quarter the prior year. For the fiscal year it was $46, compared to $44 for the prior fiscal year. The increase was due to higher costs and softer demand.

We had $33.8 million in cash and short-term investments, and $35.7 million in inventory, with no debt as of March 31, 2014. The increase in inventory was due to promotional buying opportunities. Net cash from operations for the fiscal year was $13.5 million, compared to $13.3 million for the prior fiscal year. This ends the financial review. Operator, we're ready to take questions.

Sir, are you ready for questions at this time?

Yes, we are.

Thank you. One moment, please. We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Kevin Ellich with Piper Jaffray. You may ask your question.

Good morning. Menderes, just wanted to go back, did you say new customers added during the quarter was 107,000. Is that right?

That is correct, yes.

Okay. Looking at customer-acquisition costs coming in at $49, it looks like the last couple quarters we've seen it grow over 10%, it was up by about 12%, 13% last quarter. Is this kind of the pace of growth? Is it going to increase this much going forward? What are you guys expecting?

Overall, we are anticipating the cost per impression to go up slightly in the current fiscal year, but the last two quarters you have to take into account that it was our off-peak season, and the most of the increase was due to higher costs, and also some of it for softer demand.

When you say up slightly, are we talking low single digits, or can you helps help us out there?

As far as the cost, high single digits.

High single digits. Got it. Okay, that's helpful. Then you did a good job on the gross-margin improvement. In the press release you called out certain products where you saw cost reductions. Is there any category or specific product line you can talk about where you guys saw those improvements?

We're not going to comment on that due to competitive reasons.

Okay. Do you expect, though, gross margins to stay at these levels, or how should we think about that as we adjust our models?

It should follow a similar trend as the last year. It's typically lower in the June quarter, and on the peak season I should say, usually our gross profit is lower due to product mix. It should follow the same trend as it did quarter to quarter the last fiscal year. We're going to attempt to keep it the same, and attempt to improve it, but the market conditions will also impact it. Depends on how competitive the pricing is in the market.

Got it. Two last quick questions from me. One, weather. You called it out in the press release again due to the cold winter and maybe delayed flea and tick season and heartworm. But have you seen any pick-up here in April, and did weather cause any delay in shipments during the quarter? Lastly, in 2015 you called out planning to focus on new order sales. Is there anything specifically you plan to implement, or strategically what are you going to do to drive new order sales? Thanks.

I'll start with your last question. As far as focusing on new order sales, we're putting more resources on it to attempt to improve it, so we're going to launch a new campaign. We'll see how that performs. As far as the quarter is concerned, there were -- time to time there were some shipping delays due to the difficult weather conditions.

Have you seen a pick-up here in April, now that we are kind of right in the heart of flea and tick, heartworm season?

For me to comment on the current quarter could be misleading since we still have two more months to go, so we prefer to talk about the current quarter in July.

Fair enough. Thank you.

You're welcome.

Thank you. Our next question comes from Michael Kupisky with Noble Financial. You may ask your question.

Thank you. I know last year Menderes that you guys did very heavy promotions, something that you kind of were outside of the box in. I was just wondering, and I know you always do promotions, but in terms of the variances in terms of the promotions this year versus last year, were the promotions just not as effective, or what do you -- what were your thoughts in terms of the promotions versus this year versus last year?

We're going to -- are you talking about the last fiscal year, or are you talking about the current fiscal year?

The last fiscal fourth quarter last year, versus this year.

Our promotions were similar to the prior year. It wasn't much different. We had a little bit more, but it was fairly similar.

Okay. When I look across the landscape on your various flea and tick products available on the Internet, seems that you're not the lower-priced option. I was just wondering if you can chat a little bit about the price competition that's in the marketplace. If you can also talk to me a little bit about in terms of customers, what they're looking for when they go on the Internet. Are they looking for convenience or are they looking for price?

Depends on a customer, obviously. Certain portion of the customers are going to be looking for convenience and certain portion are going to be looking for price, or both. But flea and tick topicals are very competitive, and the market is crowded, and it has been for a while. We believe we do survey the market. We believe overall we're competitive.

With the advertising spending down in the last quarter, are you reviewing the content, or is this solely a function of the price of the television advertising right now versus the revenue return?

With the content, I assume you're talking about the creatives that we're using?

Yes.

Yes, we're reviewing the creatives. We put additional resources into it, so we'll be testing different creatives, and even different stations and media to see if we can improve new order sales.

With that, do you think that would effective in this quarter where you would see that? Because obviously I would think you would want to step up on the advertising a little bit, if possible. Are you anticipating advertising spend to kind of increase in the quarter?

We have budgeted higher dollars for the quarter. We'll see if we can spend it efficiently. Yes, we do have new creatives coming up. We're going to launch it actually next week. Depends on how it does. It may impact the quarter.

An off-the-wall question, but does the extreme weather affect flea and tick sales. For instance, with the extreme weather and the wintery weather in the last quarter, does that necessarily mean maybe that flea and ticks are not as prominent in this season because of the winter weather? I'm just -- want to know --

Of course it does, yes.

In other words, the flea and tick is not going to be as severe, in other words, right?

That is correct, yes.

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

The next question comes from Erin Wilson with Bank of America.

Great, thanks. As it relates to product procurement, can you speak to the potential implications of industry consolidation with Eli Lilly and Novartis combining here, particularly in light of the fluctuations that you saw with Novartis recalls, historically?

Our vendor relationships are confidential and proprietary, so I'm not at liberty to comment on that.

Right. But what historically has been the implications of broader industry consolidation from a vendor standpoint?

It has not had much of an impact so far. But that doesn't mean that will not be the case going forward.

Okay. Looking at your cash conversion cycle inventories were significantly higher sequentially and year over year. Would this be a function of seasonality or attributable to some sort of fundamental shift, or is this just opportunistic inventory build in the quarter?

Opportunistic inventory build in the quarter. When there's a cost advantage, we'll carry higher inventory.

Okay, great. Broadly speaking, where are you seeing the most competition from now or new competition? Is it the online retailers? Is it big box retailers, human pharmacies, or the traditional vet clinic?

Really the competition is on the flea and tick topicals, is where the market is very competitive, and both online and big box retailers are impacting it.

Okay. All right, thanks so much.

You're welcome.

Thank you. Our next question comes from Ross Taylor with CL King. You may ask your question.

Hi. I know on an annual basis you typically disclose what your mix of prescription revenues was for the year. Now that the fiscal year is over, I just wondered if you have that for fiscal year 2014?

Yes, we do. The prescriptions were 44% of the sales, compared to 40% in the prior fiscal year.

That's a big change. Can you talk about any product categories that really drove that mix shift?

There's a shift, and so the prescription business grew double-digit, but I'm not going to comment as far as categories are concerned.

Okay. Somebody else might have tried to drill down into this on an earlier question, but you mentioned some cost reductions on certain brands. Can you talk about kind of what general categories they were in, whether it was flea and tick, prescription versus OTC, or anything like that?

Again, due to competitive reasons, we're not going to comment on that question.

Okay, and final question. Can you share any thoughts on what some of the new medications, particularly Next Guard, what kind of impact you can foresee that having on your business? It does look like the price point's quite a bit higher than, say, for a Front Line. I just wondered how you think that might impact your business over the next two or three years?

It should impact it positively. It's a pill, so it's more convenient for the customer compared to a topical. We anticipate that it will impact it positive.

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

You're welcome.

Thank you. Next question comes from Mitch Bartlett with Craig-Hallum. You may ask your question.

Yes, I think you've tried to fend off a little of the gross margin analysis on mix, but I was just -- it seems from your commentary and from what's obvious from the weather that flea and tick was probably weak in the quarter and prescriptions were strong. Can you give us a measure of how much gross margins benefited just from pure mix shift between those two broad categories?

Any time the flea and tick is weak -- the flea and tick has the topicals I should say -- flea and tick topicals, have the lowest margin. Any time that's weak, overall gross profit percent is going to benefit from it. You see that every year, it's every really March quarter, so you should really look at it each quarter separately. If you look at prior years, it's similar results.

The full year was 4% more prescriptions. I bet the fourth quarter was a little more weighted towards prescriptions than even that 4% shift. That probably benefited the gross margin is what you're saying?

Somewhat, but we did better as far as buying is concerned. There were cost reductions on certain brands during the quarter.

Okay.

That helped it.

The inventory build probably -- presumably benefits from that, those opportunity buys as well, for the next quarter?

That is correct, yes.

Just interested in kind of the active base of customers. What has happened over the last few years? It's been a hard thaw to get new customers on board, and you've done a phenomenal job with the base of customers and keeping those orders. But is the total base of active customers continuing to erode a little bit as you haven't replenished the base?

Slightly, maybe. I would say it's pretty much flat.

Just in pure activity year over year?

Right.

Very good. Thank you.

You're welcome.

Thank you.

(Operator Instructions)

Our next question comes from Anthony Lebiedzinski with Sidoti. You may ask your question.

Good morning. My first question is on the average order value. You said that this was a function of a change in product mix. Just wondering if you can give us some examples of some of this, and also do you think this trend is sustainable in fiscal 2015?

The trend is probably going to continue. As I've already given the prescription business growth, there's a shift to prescription.

Okay, that's helpful. As far as fiscal 2015, your advertising budget, is it going to be allocated in a similar way to TV versus online and other media mix, or are you looking to make any changes to how you allocate your advertising dollars, in terms of whether it's maybe more online, maybe less TV? What are your thoughts on that?

It will probably be a similar mix. That's what we're planning so far. Our marketing approach has been multi-channel, and the channels complement each other. It's difficult to shift dollars to other channels in a cost-effective manner.

Lastly, can you give us any update on a new facility? I know the current facility that you're in expires, the lease expires next year. Have you made a decision where you'll move, or is that still something you're working on?

We're going to delay it -- it looks like by about a year to 18 months.

Okay, so you're going to sign a lease extension on your current facility?

That is correct, yes.

Okay, thank you.

You're welcome.

Thank you. Our final question comes from Kevin Ellich from Piper Jaffray. You may ask your question.

Mederes, two last questions here. Going back to the last question on the delay of the new facility, I guess what led you guys to delay this by a year to 18 months? The other question I had, with the new products coming to market like Next Guard [Abidthal], which is on back order now, I guess, how confident are you that you'll be able to obtain adequate supply once manufacturing capacity's back on line, since I think some of these new products have track-and-trace technology?

The first question, as far as the delay is concerned, we're working on upgrading our software, and we did not want to also make a move at the same time, so that's the reason for the delay. We're going to do one at a time. As far as your next question is concerned, so far we have been able to get -- our history has been that we've been able to get the product, but that doesn't mean we're not going to have challenges going forward.

Got it. Thank you.

You're welcome.

Thank you. At this time, I'll turn the call back over to Menderes Akdag.

Thank you. For the fiscal year 2015, we are focusing on improving our new order sales. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call.

Thank you. Thank you for participating in today's call. You may now disconnect your line.