Petmed Express Inc (PETS) 2014 Q1 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 for the first fiscal quarter ended on June 31, 2014. 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 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 directs consumer to order by phone or on the Internet in aim to increase of the recognition of the PetMeds family of brand name's. 1-800-PetMeds provides an 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'd 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 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 will review the highlights of our financial results. We'll compared our first fiscal quarter ended on June 30, 2014 to last year's quarter ended on June 30, 2013.

For the first fiscal quarter ended on June 30, 2014, sales were $72.5 million, compared to sales of $74.2 million for the same period the prior year, a decrease of 2.2%. The decrease was due to decreases in new order and reorder sales. The demand was soft for flea and tick topicals compared to last year. Our average order was approximately $78 for the quarter, compared to $77 for the same quarter the prior year.

For the first fiscal quarter, net income was $5 million, or $0.25 diluted per share compared to $4.8 million or $0.24 diluted per share for the same quarter last year, an increase to net income of 4.6%. Re-order sales decreased slightly to $58.5 million for the quarter, compared to re-order sales of $59 million for the same quarter the prior year. Re-order sales decreased by 7.7% to $14.1 million for the quarter, compared to $15.2 million for the same quarter the prior year.

The decrease was mainly due to an increase in customer acquisition costs and reduction in advertising. We acquired approximately 184,000 new customers in our first fiscal quarter, compared to 207,000 for the same period the prior year.

Approximately 80% of our sales were generated on our website for the quarter, compared to 79% for the same period 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-seasons.

For the first fiscal quarter, our gross profit as a percent of sales was 32.8%, compared to 32.4% for the same period a year ago. The increase was due to a reduction of product costs on certain brands.

Our general and administrative expenses were flat compared to last year. We spent $9.9 million in advertising for the quarter, compared to $10.4 million for the same quarter the prior year, a decrease of 4.8%. The advertising cost of acquiring a customer was approximately $54 compared to $50 for the same quarter the prior year. The increase was due to advertising cost increases.

We had $44.7 million in cash and short-term investments and $32.9 million in inventory with no debt as of June 30, 2014. Net cash from operations for the quarter was $14.3 million.

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

(Operator Instructions)

Kevin Ellich, Piper Jaffray.

Mendo, I've got a few questions here. So let's just start off -- you said there was soft demand for topicals. Any idea what was driving that? Because I think seasonality was a little bit later, so shouldn't we have seen kind of a strong flea and tick season this quarter? Was that surprising to you?

The season started late, so the demand was weak for the flea and tick topicals compared to last year for the June quarter.

Okay. Did you guys get any inventory for the chewable flea and tick?

Yes.

If so, how was demand for those products?

Those are increasing.

Okay. Got you. That's helpful.

Then, advertising costs increased you said. Was that for TV and Internet? What's your outlook for the year -- or for the remainder of the year?

We paid more per impression, both on the Internet and on TV. Our outlook is, overall, we are anticipating the cost per impression to go up mid- to high-single digit.

Mid to high, got you. That's helpful.

Compared to last year.

Year over year, got you. Okay.

Then, you also made a comment about -- in the press release, for the remainder of the year, focusing on improving marketing efforts. Could you talk about what you're doing to improve the marketing efforts, to drive more higher sales?

We are putting more emphasis on the database marketing, more from maybe mass marketing towards more database marketing, one-to-one marketing.

Okay. That's helpful.

Then you also talked about cost reduction in certain brands helped boost your gross profit this quarter. Could you -- any specific brands you want to call out, or any specific categories where you saw those lower costs?

I'm not going to comment on that.

Okay, sounds good. That's all I have, guys. Thanks.

Thank you.

Erin Wilson, Bank of America Merrill Lynch.

Just the first one, as a follow-up to the last question: The lower cost for certain branded products -- is that sort of trend sustainable going forward? Or how should we think about that dynamic as it relates to the gross margin?

We hope so; we're going to try.

Okay. Was it meaningful at all, as far as a material contributor?

Well, it's 40 basis points, so the number speaks for themselves. So the gross profit margins improved by 40 basis points.

Okay. Great.

Then in the parasiticide space and generally speaking, are you seeing more customers purchasing the three-month packs versus the six-month packs compared to last year's experience -- just trying to figure out the dynamic there as well.

It was fairly similar. There was no material difference between this June quarter compared to last June.

Okay. Where do you think the markets stand overall as far as the eCommerce online channel? Do you think it's gaining share in this pet specialty arena? Where do you expect that to go over the next few years?

The brick-and-mortar is gaining more market share on the over-the-counter medications, especially flea and tick topicals, it appears like. I would say online is still gaining some market share. We expect that to continue for the next couple years.

Okay. Great. Thank you so much.

You're welcome.

Anthony Lebiedzinski, Sidoti & Company.

Could you comment or give at least some color as far as how your prescription medication business did versus your -- I know, as far as the over-the-counter you mentioned flea and tick, but if you could just give us some color as far as how those product segments did, that would be great.

Directionally, prescription business was up, compared to last June.

Okay. So does that explain perhaps to a certain extent why your gross margin was up? Because usually your prescription medications do have a better gross margin than OTC.

That is correct. Yes.

Okay. Got it. Okay. Also -- as far as the steps that you're taking to improve your marketing efforts, is it just focusing more on database marketing? Or is there anything else that we should think about as to how you're going to try to get increased sales?

More emphasis on database marketing, I would say would be the primary -- that we want to improve that area.

Okay. Got it. All right, thank you very much.

You're welcome.

Michael Kupinski, Noble Financial.

I was wondering if you need to advertise more on television to keep your brands relevant? In other words, you seem to be determining your advertising spend based on revenue contribution, but is there a point when the Company might need to advertise more aggressively to -- just to maintain the brand itself?

It depends on -- the data is showing that it was cost prohibitive to spend more. So that's why we did not. So you have to look at the lifetime value of the customer versus what the acquisition cost is coming at.

Incrementally, it's higher than the average $54. So it was cost prohibitive to spend more in the June quarter. It doesn't mean it will not be beneficial sometime in the future, so it depends on where the numbers are coming at.

Okay. Can you talk a little bit more about the competitive landscape toward flea and tick? Do you need to lower your prices on flea and tick topicals to maintain market share? What is your strategy regarding the topical side of the Business?

We do survey the prices in the market. We believe we price ourselves competitively. So we are competitive already.

I guess the question would be that PetMeds has always been viewed as being the low-cost provider, or the cheaper alternative so to speak. What -- it seems like the flea and tick topical is not always the cheapest online. What are your thoughts about how you -- obviously, the competitive landscape has increased. What are your viewpoints about how to kind of tackle that market so that we can see a reversal and keep growth in that business?

Well, I mean, we may be slightly more aggressive pricewise going forward to at least keep the market share on the topical.

On the previous question about chewables -- I guess in terms of just kind of a follow-up on there -- in terms of chewables, in terms of the market share right now, where do you anticipate the chewables in terms of flea and tick? What type of market share did they have at this point?

I don't have that data at this time. But you have to take into account that it's new. So it's going to take a little time for it to grow.

In your viewpoint there, you have a better competitive advantage? Or do you, in terms of pricing, structure or anything like that, how do you view the landscape for chewables for you versus the competition?

It's a prescription item, so there is a barrier to entry. So we like it, so yes. We do have a competitive advantage there.

In terms of your accessory business in the quarter, was there anything notable in the quarter of that portion of the Business?

No, it was fairly flat actually.

Okay. Any thoughts about new products or anything like that at this point? Or is it just still status quo there?

We are always looking at more unique products, niche products. So we are in the process of looking at them and adding to what we are offering.

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

You're welcome.

(Operator Instructions)

Ross Taylor, CL King.

A lot of my questions have been answered, but maybe I'll just start out -- it seems like customer acquisition costs seem to just kind of continue to trend up. Do they ever reach a level or a point in time where it maybe makes you rethink your new customer, new acquisition model, or seek other ways to generate more customers?

That's why we said we are putting more emphasis on our database marketing; so moving from mass marketing towards more to database, one-to-one marketing.

Okay. Final question just relates to your accessories and supplies business. Any comments there as to how things are trending or how much incremental effort you may be putting behind that aspect of your Business?

It was pretty much flat. So we are not putting as much effort at this time, but that doesn't mean we won't in the future.

All right. Thanks very much.

You're welcome.

Mitch Bartlett, Craig-Hallum.

Same line of questioning, just: why not use price more aggressively to drive customer acquisitions? I get -- using my net numbers, $54, is the lot highest customer acquisition costs you've ever recorded. If marketing direct is becoming a little bit cost prohibitive to grow the Business, why not use price more aggressively?

We may in the future, but obviously it will impact the bottom line. So we're both bottom-line conscious and I try to grow the top line. So we may in the future.

The inventory that you have -- you've scaled up your inventory; obviously there's some favorable buys over the last little while. How has that contributed to your gross margins? Is that a continuing strategy that you'll employee to continue to buy some gross margin?

Yes. It's helped the gross margin, as you pointed out. When there's a cost advantage, we will carry higher inventory.

Okay. Database management -- what does that mean? When you're marketing to a database on more one-to-one, is that the existing base of customers that you're going after to increase your percentage of their total spend?

The existing database, ex -- obviously, includes ex-customers. They are not active customers. Also, it includes inquiries, inquiries that never purchase from us.

How is the active customer reorder file year over year? Is it down or is it flat? I see that the sales kind of flipped a little bit, but the actual customer activity, what's going on?

Reorders as a percent of prior year's total sales was at 79%. So it's not too bad.

Okay. Okay. Thank you.

You're welcome.

Thank you. We do not have any further questions in queue. I'd like to turn the call over to Mendo Akdag.

Thank you. For the FY15, we are focusing on improving our marketing efforts to increase 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 now disconnect.