Petmed Express Inc (PETS) 2014 Q4 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 fourth fiscal quarter and fiscal year ended on March 31, 2015. 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 medication 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 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 medication 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, 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 on 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. 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, 2015 to last year's quarter and fiscal year ended on March 31, 2014. For the fourth fiscal quarter ended on March 31, 2015, our sales were $50 million, compared to sales of $48.6 million for the same period the prior year, an increase of 2.8%. For the fiscal year ended on March 31, 2015, sales were $229.4 million, compared to $233.4 million for the prior fiscal year, a decrease of 1.7%. The increase in sales for the quarter was due to an increase in reorder sales. The decrease in sales for the fiscal year was due to a weakness in demand for flea and tick topicals for the first part of the fiscal year.

The average order was approximately $81 for the quarter, compared to $77 for the same quarter the prior year. It was $77 for the fiscal year, compared to $75 for the prior fiscal year. The increase in average order of value was mainly due to a change in product mix to a higher price item and increased doses. For the fourth fiscal quarter, net income was $5 million, or $0.25 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 9.4%.

For the fiscal year, excluding a one-time charge for an IT-related discontinued project in the September quarter, net income was $18.5 million or $0.92 diluted per share compared to $18 million or $0.90 diluted per share a year ago, an increase to net income of 3.1%. The one-time IT-related discontinued project charge in the September quarter was $1.7 million before taxes, and the net after tax impact of this charge was $1.1 million or $0.05 diluted per share.

Reorder sales increased by 3.6% to $42.5 million for the quarter, compared to reorder sales of $41 million for the same quarter the prior year. For the fiscal year, reorder sales decreased slightly to $189.7 million compared to $191.2 million for the prior year. New order sales decreased slightly to $7.5 million for the quarter, compared to $7.7 million for the same period the prior year. For the fiscal year, year new order sales decreased by 5.9% to $39.7 million compared to $42.2 million for the prior year. We acquired approximately 97,000 new customers in our fourth fiscal quarter, compared to 197,000 for the same period the prior year. We acquired approximately 529,000 new customers in the fiscal year, compared to 597,000 for the prior year.

For the quarter, approximately 81% of our sales were generated on our website, compared to 80% for the same period the prior year. For the fiscal year, it was 80%, compared to 79% for the prior year. The seasonality in our business is due to the proportional 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 was 33.9% compared to 35.9% for the same period a year ago. For the fiscal year, our gross profit as a percent of sales was 33.2% compared to 33.3% for the prior year. The percentage decrease for the quarter can be attributed to more aggressive pricing.

Our general and administrative expenses as a percent of sales were 9.8% for the quarter, compared to 10% for the same quarter the prior year. For the fiscal year, the G&A was the same 9.2% compared to the prior year. We were able to leverage the G&A for the quarter. For the quarter, we spent $4 million in advertising, compared to $5.3 million for the same quarter the prior year, a decrease of about 23%. For the fiscal year, our spending was $25.2 million for advertising, compared to $27.2 million for the prior fiscal year, a decrease of about 7%. The decrease for the quarter was mainly due to decreases in mass marketing spending in order to be more efficient.

Advertising cost of acquiring a customer for the quarter was approximately $42 compared to $49 for the same quarter the prior year. For the fiscal year, it was $48 compared to $46 for the prior fiscal year. The decrease for the quarter was due to a decrease in advertising spending with a higher return. The increase for the fiscal year was due to an increase in advertising costs. We had $51.2 million in cash and short-term investments and $25.1 million in inventory, with no debt as of March 31, 2015. Net cash from operations for the fiscal year was $32 million, compared to $13.5 million for the prior fiscal year. The majority of the increase was due to a reduction in inventory.

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

(Operator Instructions)

Kevin Ellich, Piper Jaffray.

Menderes, can you go over the reorder and new order sales again?

For the quarter, reorder sales increased by 3.6% to $42.5 million, compared to reorder sales of $41 million for the same quarter the prior year.

Got it. Okay, then.

New order sales for the quarter was at $7.5 million, compared to $7.7 million for the prior in the same quarter.

Okay, that's helpful. Great. Great. Then the gross margin declined pretty -- a couple of hundred basis points. What was really driving that? Is it mix shift to lower margin products? Or can you give us any color behind what's causing that?

More aggressive pricing, especially on over the counter meds was the reason for the decline.

Okay. That's helpful. Then, let's see -- you keep talking about a decline in the flea and tick topical medications. Do you think that's going to reverse at any point in time? I guess, what do you see this flea and tick season already?

It was a little better in the March quarter. My comment was for the beginning of the fiscal year -- the last fiscal year that just, we just completed.

Okay. Okay. Then my last question, you also mentioned that average order size was up, I think 5% due to mix, I guess? Could you give us any color or maybe a little bit more on what products, specifically, you are seeing growth in? Do you expect this to continue?

I'm not going to get into the specifics due to competitive reasons. But the sales shifted to higher priced items. Also, we saw that there was increase in doses per order.

Okay, that's helpful. Appreciate it. Thanks. Nice quarter.

Thank you.

Mitch Bartlett, Craig-Hallum.

So just to kind of jump into the gross margin just a little bit further, down 200 basis points or so year-over-year, even though the shift favors the prescription side. So you really did take out -- maybe you could comment on pricing year-over-year in flea and tick and on the prescription side? What really happened? Why the shift, do you think, in larger doses? Does that cannibalize go-forward orders? Or was there a promotion in the quarter? Maybe you could explain that?

We are promoting higher doses. So that's the main reason. We were more aggressive, price-wise, on the OTC products, especially flea and tick.

So aggressive on both sides, is what I'm hearing? Is that --?

Well, higher doses is not a bad thing. So we like higher doses. So we are promoting higher doses.

Got it. Got it. Then advertising, you are really, it seems like you are cutting your advertising. It was down, what did you say, 23% year-over-year? Maybe some more explanation of why not spend more? Why not go after those customers in a more aggressive way?

The return on investment is not there for the incremental dollars spent. So we did not want to waste any money.

Do you see that changing at all?

I mean, it's hard to tell. It could. But the numbers will dictate it.

Got it. Okay. Thank you.

You're welcome.

Erin Wilson, Bank of America.

Looking -- asking again about the advertising expenses, how should we think about it going into next year? What are you seeing in the market now? How should we anticipate sort of the quarterly progression of those expenses?

Our budget is about the same, I should say, slightly higher than last year's -- last fiscal year's actual numbers. But it will depend on if the ROI is there or not. We are also tweaking it as far as -- we are going to do less mass marketing and more database one-to-one marketing.

Okay, great. Do you have access to the new prescription chewable flea and tick medication such as NexGard and Bravecto? How is that dynamic sort of contributing to the gross margin?

We do have access to them. We like them.

So favorable to the gross margin then?

Yes.

Okay. All right. Thank you so much.

(Operator instructions)

Anthony Lebiedzinski, Sidoti & Company.

Can you just go over what your prescription sales were for the fiscal year? Over the counter? Maybe you can touch on performance of generics and pet supplies, as well?

The prescription business roughly was about 50% of the business for the fiscal year.

Got it, okay. As far as generics?

Generics growth wasn't -- it was, what I would say, flat. Pet supplies actually were down.

Okay. So given that it was down here, is that -- how do you view that category going forward? Will you continue to emphasize it or deemphasize it and just focus more on prescriptions?

Are you talking about generics or pet supplies?

Pet supplies.

We are not focused at this time. But we are adding some products, so we'll see if we find any exciting niche products to sell. So that's our focus at this time.

Got it. Okay. Can you give us any specific steps or give us at least more color as to what steps are you taking to improve your marketing efforts to improve sales and profitability?

We are putting more emphasis on database marketing and less on mass marketing because the ROI on incremental dollars are not meeting our thresholds.

Okay. Also just longer term, what is your view of the dividend which you bumped up a little bit today?

It's $0.18 was what the Board decided to give, so that's what it is.

Okay. But that's all you can say as far as going forward?

I don't want to speak for the Board. So, I would get in trouble.

Okay. Thank you.

Mitch Bartlett, Craig-Hallum.

Yes, just -- I would like to touch on inventory. So it looks like historically -- there's some deviation to this -- but historically that Q4 is the peak in your inventory. This year, completely different. It's down pretty sizably. Lack of opportunity buys? Lack of -- maybe you could just --

Yes, there was no cost advantage for carrying higher inventory. So that's why it was what it was.

In going forward, will this be a new, normalized level? Or is it just opportunistic?

Opportunistic. Our inventory will fluctuate based on the opportunistic buying opportunities.

There just hasn't been any here recently?

Obviously, there was no cost advantage. Otherwise we would have had higher inventory on the March. I cannot speak for now.

What does that do? Or how does that influence the gross margins going forward -- ?

You will see that in the July, when we announce the numbers.

Okay. Okay. All right. Good. Thank you.

You're welcome.

At this time, I have no additional questions on queue. I would like to return back to Mr. Akdag for closing remarks.

For FY16, we are focusing on improving our marketing efforts to increase sales and profitability. 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.