Petmed Express Inc (PETS) 2014 Q3 法說會逐字稿

Welcome to the PetMed Express Corporation, doing business as 1-800-PetMeds conference call to review the financial results for the third fiscal quarter ended on December 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 companies 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 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 we will review the highlights of our financial results. We'll compare our third fiscal quarter and nine months ended on December 31. 2014, to last year's quarter and nine months ended on December 31, 2013.

For the third fiscal quarter ended on December 31, 2014, sales were $49.3 million, compared to sales of $50.1 million for the same period the prior year, a decrease of 1.6%. For the nine months ended on December 31, 2014, sales were $179.4 million, compared to sales of $184.8 million for the nine months the prior year, a decrease of 2.9%.

The decreases in sales were due to decreases in new order and re-order sales. The average order value for the quarter was approximately $76, compared to $72 for the same quarter the prior year.

For the third fiscal quarter, net income was $4.8 million, or $0.24 diluted per share, compared to $4.5 million, or $0.23 diluted per share, for the same quarter the prior year, an increase to net income of 5.6%. For the nine months, excluding a one-time charge for an IT-related discontinued project in the September quarter, net income was $13.6 million, or $0.67 diluted per share, compared to $13.4 million, or $0.67 diluted per share a year ago, an increase to net income of 1%.

The one-time IP-related discontinued project charge in the September quarter was $1.7 million before taxes. The net after-tax impact of this charge was $1.1 million, or $0.05 diluted per share.

Re-order sales decreased slightly to $42.2 million for the quarter, compared to re-order sales of $42.4 million for the same quarter the prior year. For the nine months, the re-order sales decreased by 2% to $147.2 million, compared to $150.2 million for the same period a year ago.

New order sales decreased by 7.5% to $7.1 million for the quarter, compared to $7.7 million for the same period the prior year. For the nine months, the new order sales decreased by 6.9% to $32.2 million, compared to $34.5 million for the same period last year. The decrease were mainly due to increase in customer acquisition costs.

We acquired approximately 96,000 new customers in our third fiscal quarter, compared to 114,000 for the same period the prior year; and we acquired approximately 430,000 new customers in the nine months, compared to 490,000 for the same period a year ago. For the quarter, approximately 80% of our sales were generated on our website, compared to 79% for 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 third fiscal quarter, our gross profit as a percent of sales was a 34.7%, compared to 33.7% for the same period a year ago. For the nine months, our gross profit as a percent of sales was 33.1%, compared to 32.6% for the nine months a year ago. The percentage increases can be attributed to a shift in sales to higher-margin items.

Our general and administrative expenses were lower by $160,000 for the quarter, and about $280,000 for the nine months, compared to the same period last year. For the quarter, we spent $4.3 million in advertising, compared to $4.5 million for the same quarter the prior year. For the nine months, we spent $21.1 million for advertising, compared to $21.9 million for the nine months the prior year.

Advertising cost of acquiring a customer for the quarter was $45, compared to $40 for the same quarter the prior year. For the nine months it was $49, compared to $45 for the same period a year ago. The increases were mainly due to advertising cost increases.

We had $52.6 million in cash and short-term investments, and $21.6 million in inventory, with no debt as of December 31, 2014. Net cash from operations for the nine months was $29.5 million, compared to $17.7 million for the nine months the prior year. The increase was mainly due to a reduction in inventory and pre-paid expenses.

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

(Operator Instructions)

Kevin Ellich, Piper Jaffray.

Hi, this is Colin Clark on for Kevin Ellich. I'm wondering if you can give us any more detail on the advertising costs down? Last quarter, you mentioned that cost per impression were up mid- to high-single digit, and that the TV online were up across the board. I'm just wondering if you see any changes there going forward?

We are anticipating that cost per impression going forward is going to go up mid-single digits.

Okay, got it. One more follow-up: I'm wondering if you can give us any more details on the improved marketing and data best efforts? You mentioned a full implementation last quarter coming in the spring; just wondering if that timing is still on track?

That timing is still on track, yes.

All right, thank you.

You're welcome.

Anthony Lebiedzinski, Fidelity.

Yes, good morning. This is Anthony Lebiedzinski from Sidoti. Looking at the gross margin, definitely an impressive improvement; up 98 basis points. Can you just give us a sense as to whether this was mostly driven by an increase in your prescription business? If that's the case, how sustainable are these trends?

Sales shifted to higher-margin items. It's going to depend on the sales mix going forward, if we can sustain it or not.

Okay. Looking at your comment about the focusing on improving your marketing efforts to increase sales -- are there any new initiatives under way? Can you give us some more color about this, please?

We will be running some new campaigns. Actually, we're currently running a new creative. Also, we will put more emphasis on database marketing. But I'm not going to get into specifics due to competitive reasons.

Okay, that's understandable. Just wondering, as far as the AOV -- what drove that AOV increase? Can you give us some examples, please?

Sales shifted to higher-priced items -- was the main reason for increase. Also, there were some higher quantities purchased.

Okay. In other words, did you see more people buying, let's say, six packs of flea-and-tick medications, versus three packs the year before? Is that a good example?

Yes.

Okay. All right, thanks a lot.

You're welcome.

Thank you, sir.

(Operator Instructions)

Mitch Bartlett, Craig-Hallum.

Hi, good morning. It seems like so much of the conversation is about the mix shift more to prescription, away from OTC, and how that is supporting numbers, despite customer counts that are down, order counts that are down, things like that. Has there been a change in the way you go after a customer? Did, in the past, you lead with a flea and tick, and convert them into a prescription; now you go hard for a prescription customer? Perhaps that's why the cost of customer acquisition is going up, because that's a more valuable customer? Maybe you could just talk to us about the strategy around the mix shift, and how you are positioning the Company?

I can tell you that there has been some change in the last, I would say, one year. Obviously, we are going after the more profitable sales, and where there is less competition.

Got it. Does that mean the media advertising has changed -- the mix of media has changed, or --?

No, it has not changed much. If it changed, it would change due to the cost, not necessarily us driving it.

Okay. Thank you.

Thank you, sir. I will now turn the meeting over to Mr. Akdag. Sir, you may begin.

Going forward, 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.

That concludes today's conference. Thank you for participating. You may now disconnect.