Petmed Express Inc (PETS) 2015 Q1 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 first fiscal quarter ended June 30, 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 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 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 now like to turn the call over to the Company's Chief Financial Officer, Mr. Bruce Rosenbloom. Sir, you may begin.

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 result 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, the President and Chief Executive Officer of 1-800-PetMeds. Menderes.

Thank you, Bruce. Welcome and thank you for joining us. Today we will review the highlights of our financial results. We'll compare our first fiscal quarter ended on June 30, 2015 to last year's quarter ended on June 30, 2014. For the first fiscal quarter ended on June 30, 2015, sales were $71.6 million compared to sales of $72.5 million for the same period the prior year, a decrease of 1.3%.

The decrease was due to decreases in new order sales, offset by increases in reorder sales. Our average order was approximately $82 for the quarter compared to $78 for the same quarter the prior year. The increase in average order value was mainly due to a change in product mix to higher priced items and increased doses. For the first fiscal quarter, net income was $5.8 million or $0.29 diluted per share compared to $5 million or $0.25 diluted per share for the same quarter last year, an increase to net income of 16%.

Reorder sales increased by 1.8% to $59.6 million for the quarter compared to reorder sales of $58.5 million for the same quarter the prior year. New order sales decreased by 14% to $12.1 million for the quarter compared to $14.1 million for the same quarter the prior year. The decrease was mainly due to a reduction in advertising. We acquired approximately 148,000 new customers in our first fiscal quarter compared to 184,000 for the same period the prior year. Approximately 81% of our sales were generated on our website for the quarter compared to 80% 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 32.1% compared to 32.8% for the same period a year ago. The decrease was due to increases in product cost. Our general and administrative expense as a percent of sales was the same, 8.1% compared to last year. We spent $7.9 million in advertising for the quarter compared to $9.9 million for the same quarter the prior year, a decrease of about 20%. The decrease for the quarter was mainly due to decreases in mass marketing spending due to diminishing returns. The advertising cost of acquiring a customer was approximately $53 compared to $54 for the same quarter the prior year. We had $58.3 million in cash and short-term investments and $27.2 million in inventory, with no debt as of June 30, 2015. Net cash from operations for the quarter was $10.8 million.

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

(Operator Instructions)

Our first question is Mr. Kevin Ellich of Piper Jaffray.

Good morning. Thanks for taking the questions. Menderes, I've got a few for you.

So you just made a comment about advertising costs being down 20%, which is the second quarter in a row where it's been down at least that much. You mentioned mass marketing spending was down due to diminishing returns. How should we think about your advertising expense going forward? Should we continue to model down 20% each quarter?

That is difficult to answer. It will depend on the ROI. The ROI was not there for the incremental dollars spent and that's the reason we did not spend it. So it will depend on how the ROI comes going forward to be able to answer your question.

Can you talk a little bit about the mix between television versus online? How were the dollars, that $7.8 million, $7.9 million that you spent this quarter allocated?

I can tell you that the majority of the reduction was on television.

Okay. Sounds good. And then going back to your comments about the product mix going to higher priced items and increased doses, do you have any more color as to which products we're looking at? Are we looking at some of the new markets that have come to market in terms of oral parasiticides given the flea and tick season?

Due to competitive reasons, we're not going to comment on that.

Okay. That's great. And then how much do you think seasonality had to do with the increase in reorder sales or did you see anything else, any other changes in customer behavior?

As we said before, we are putting more emphasis on data-based marketing and that probably helped the reorders.

Okay. And then two last questions, could you give us the mix between generic versus branded? And then, have you been able to ascertain decent inventory of some of these new oral products?

We do have inventory of everything, so there's no shortage at this time. As far as generics are concerned, there was slight increase in generics in the June quarter.

Great. Okay. Thanks, guys.

You're welcome.

Our next question is Erin Wilson of Bank of America-Merrill Lynch.

Great. Thanks for taking my questions. Can you speak to the key drivers of the new customer growth? I know you mentioned the advertising spend, but was it purely a function of advertising or is there something more fundamental in nature going on?

Our business model is advertising driven. It's direct response marketing, so advertising drives the new orders. Also, word of mouth does, which we encourage our customers to refer us to their friends and colleagues.

Okay, great. And how would you characterize the flea and tick season now versus historical experiences?

Probably was similar to last year, the June quarter.

Okay, great. And then can you speak quickly to the dynamics across the competitive landscape, given greater omnichannel activities for some of the retailers as well as veterinarians?

The over the counter medications, especially the flea and tick topicals, are highly competitive and the market is crowded.

Okay, great. Thanks so much.

You're welcome.

Our next question is from Mitch Bartlett of Craig-Hallum.

Good morning.

Good morning.

Why would the ROI change going forward if competition seems to be pretty strong on the flea and tick side, strong across the board? What would be the conditions that would cause you to be able to advertise significantly more?

Peak season is more competitive than off-peak season, so that's one variable. And we're working on putting more emphasis on data-based marketing and we're also working on a new campaign. We're not saying it will change, but it could.

Okay. And the flea and tick side of the business, any way you could tell us how that performed in the quarter versus the prescription side?

Yes, I'm not going to get into the specifics. All I can tell you is that flea and tick topicals are highly competitive and the market is crowded.

Can you offer whether the gross margins on that side of the business were less than they were a year ago?

Yes, probably yes, yes.

Okay, okay. Inventories, last year you kind of liquidated quite a bit of inventory versus the prior year and you're up a little bit sequentially in the first quarter, but what is the -- historically, you went out and were opportunistic buyers, primarily in the flea and tick side. What does that opportunity look like right now?

I mean it changes. It varies from quarter to quarter. All I can tell you is that when there are promotional buying opportunities, we'll take advantage of them.

Okay. Thank you.

You're welcome.

(Operator Instructions)

Our next question is Mr. Anthony Lebiedzinski of Sidoti and Company.

Good morning, thank you. In light of the highly competitive and crowded market, just wondering if you plan to change your pricing strategy in regards to flea and tick or is it just going to be more of the same?

We believe we're competitive. We survey the market and price ourselves according to the market conditions. We believe we're currently competitive.

Got it. Okay. And in regards to the higher AOV, thanks for providing the details for the June quarter increase. So going forward, is that something that you guys have budgeted for as far as -- do you expect that to continue or what is your sense as to the sustainability of the AOV?

We're anticipating that it's going to continue to increase at this time.

Okay. Is it for similar reasons?

Yes.

All right. Thank you.

You're welcome.

Thank you. I would now like to return back to the speaker for the final remarks.

Thank you. 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.