Petmed Express Inc (PETS) 2015 Q2 法說會逐字稿

Welcome to the PetMed Express Incorporated doing business as 1-800-PetMeds conference call to review the financial results for the second fiscal quarter that ended on September 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 nonprescription 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 like to turn the call over to the Company's Chief Financial Officer, Mr. Bruce Rosenbloom. Thank you, you may begin.

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, the President and Chief Executive Officer of 1-800-PetMeds. Mendo?

Thank you, Bruce. Welcome and thank you for joining us. Today we will review the highlights of our financial results. We'll compare our second fiscal quarter and six months ended on September 30, 2015 to last year's quarter and six months ended on September 30, 2014.

For the second fiscal quarter ended on September 30, 2015, sales were $56.7 million, compared to $57.6 million for the same period the prior year, a decrease of 1.5%. For the six months ended on September 30, 2015, sales were $128.4 million, compared to $130.1 million for the six months the prior year, a decrease of 1.4%. The decreases in sales were due to decreases in new order sales. The average order value was approximately $80 for the quarter, compared to $75 for the same quarter of the prior year.

For the second fiscal quarter, net income was $4.5 million or $0.22 diluted per share, compared to -- excluding a one-time charge for a discontinued project, $3.8 million or $0.19 diluted per share for the same quarter of the prior year, an increase to net income of 18%. And for the six months, net income was $10.3 million or $0.51 diluted per share, compared to again, excluding a one-time charge for a discontinued project, $8.8 million or $0.44 diluted per share a year ago, an increase to net income of 17%.

Reorder sales were relatively flat at $46.7 million for the quarter, compared to reorder sales of $46.6 million for the same quarter the prior year. For the six months, the reorder sales increased by 1% to $106.2 million, compared to $105.1 million for the same period last year. New order sales decreased by 8% to $10.1 million for the quarter, compared to $11 million for the same period the prior year. For the six months, the new order sales decreased by 11.4% to $22.1 million, compared to $25 million for the same period last year.

We acquired approximately 127,000 new customers in our second fiscal quarter, compared to 152,000 for the same period the prior year. And we acquired approximately 275,000 new customers in the six months, compared to 336,000 for the same period a year ago. 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 season.

For the second fiscal quarter, our gross profit as a percent of sales was 33.3%, compared to 32.1% for the same period the prior year. And for the six months, our gross profit as a percent of sales was 32.6%, compared to 32.5% for the same period a year ago. The percentage increase for the quarter can be attributed to a shift in sales to higher margin items.

Our general and administrative expenses were relatively flat for the quarter and the six months. For the quarter, we spent $6.2 million in advertising, compared to $6.9 million for the same quarter the of prior year. For the six months, we spent $14.1 million in advertising, compared to $16.8 million during the same period a year ago.

The decreases in advertising were due to diminishing returns. The advertising cost to acquiring a customer was approximately $49 for the quarter, compared to $45 for the same quarter of the prior year. For the six months, it was $51, compared to $50 for the six months the prior year.

We had $[57.8] million in cash and short-term investments, and $24.4 million in inventory, with no debt as of September 30, 2015. Net cash from operations for the six months was $14 million.

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

(Operator Instructions)

Kevin Ellich, Piper Jaffray.

Good morning. Thanks for taking the questions. Mendo, a few things, I guess. First off, could you talk about what was driving the higher margins, what type of products are we seeing, and what categories? And can you give us a split between generic versus branded products? And then, I've got another question on the average order size.

Due to competitive reasons, we are not going to comment on it. There was some increase in private label, I can tell you that.

Okay. That's helpful. And then, on the average order size increase, was there a price increase? Did you guys push through any rate increases, or was this all just mix shift to just higher -- people spending more money on various products?

We slightly increased our prices on short-term brands during the quarter to pass some of the cost increases to the consumer, but also sales shifted to higher priced items, and we also sold higher doses.

Higher doses. Can you talk at all about what brands, or what type of -- are these parasiticides, or some of the new products that have come to market in the [oral] flea and tick category?

We really don't want to comment on it, due to competitive reasons.

Okay. That's fine. And then, on the increase in customer acquisition costs, and advertising costs was right in line with our expectations. I guess, what are you seeing in the [remnant] space? Are you shifting more towards online advertising, or are you finding the TV rates still in pretty good -- pretty favorable at this point?

Typically, I mean, the TV cost has been increasing about mid-single-digit every year. And this year, that was the case also. But we decreased TV advertising for the quarter due to diminishing returns.

Okay. And then, I guess with the comment about focusing on improving marketing efforts to drive sales and profitability, I guess what -- could you give us a little bit more color as to what that is going to entail? And then, also your thoughts on advertising costs heading into the election year? Thanks.

We are running a new campaign which we started this month, and we are putting more emphasis on the database marketing. We will see what happens. As far as the election year is concerned, we anticipate that the cost will go up, especially a few months prior to the election.

Great. Thank you.

You're welcome.

Erin Wilson, Bank of America Merrill Lynch.

Great. Thanks for taking my questions. Can you give us an update on the supplies and accessories business, and how that is progressing?

It really has been actually going down, so we have not focused on it up till now, but we are planning on revitalizing it going forward.

Do you anticipate, I guess, that being a key strategy to sort of jumpstart growth in new orders, or what is just your general strategy there? Or any sort of new initiatives?

It is really a margin issue. We like high price, high margin, lightweight products, which supplies obviously does not fit into that.

Okay. Great. And then how would you characterize the flea and tick season over this past year? Was it -- did it last later than expected? Were there any abnormal seasonal factors?

Probably similar to last year, that would be my guess at this time.

Okay. Great. Thanks so much.

Anthony Lebiedzinski, Sidoti and Company.

Good morning, guys. Thank you for taking the question. So just wanted to get your view as to the sustainability of the shift to higher margin items. Is this something that you think can continue, or is this more or less -- were there any special factors that perhaps drove the pick up in this quarter here?

We hope so. So we're -- in our advertising, we are exposing them [more]. So we will see what happens.

Got it. Okay. And could you perhaps quantify the overall impact of the price increase that you guys took in some of your items?

As far as the -- I would say (multiple speakers). Maybe about -- I will give you a rough idea. I don't have the exact math in front of me, but probably about 20 basis points of the increase is due to that.

Okay, got it. Okay. And then, when you mentioned that in the advertising space, you're seeing diminishing returns, is this across the board that you are seeing that, or is it the more TV, or it was more online? Can you just give us some color in regards to that, please?

More television.

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

You're welcome.

Mitch Bartlett, Craig-Hallum.

Sure. Good morning.

Good morning.

Mendo, maybe you could spell out the areas of strength, areas of weakness. If I were to say that the OTC business, the flea and tick business has been under pressure for years and maybe that you have withdrawn a lot of advertising initiative there, and replaced it with a more concentrated focus on getting prescription customers. And that is what is driving gross margins, that's what striving AOV. Is that a fair characterization? And how big --

Somewhat. I mean, we have not given up on the flea and tick topicals, but it is somewhat a fair characterization.

What happened to the gross margins on both sides of those equations? What is going on underneath the overall gross margin, as it pertains to prescription versus OTC?

Well, sales shifted to higher margin items including private label.

But those -- but the shift also was benefited by the gross margins in prescription perhaps?

Maybe.

Okay. All right. Inventories, any -- it seems like you are -- your inventories are up year over year, but they have been kind of trending a little bit down. Is that a situation because of opportunity buys are less prevalent? Or can you talk to the ability to acquire favorable inventory buys?

Our inventory will fluctuate based on promotional buying opportunities. When there's a cost advantage, we will carry higher inventory. But don't forget we're going into our off peak season.

Right, right. So no need to load up on inventories

That is correct.

And competition on the prescription side of the business? Any changes or any big movements? Could you discuss that?

I would say there's no big movement. There is a little bit more competition, but we have not seen any big movement.

Great. Thank you.

You're welcome.

Juan Bejarano, Noble Financial.

Hi, good morning, and thank you for taking our questions.

Sure.

So regarding your order value being higher. Correct me, if I'm wrong, but I believe that you raised the minimum order size for free shipping. I think you used to provide free shipping for orders over $35 or $39, and now it is free shipping on orders over $49. Do you feel like that helped with the average order volume value?

Probably, it probably did.

Okay. So is that a strategy that you will continue to do, I would assume?

We intend to keep it at $49 at this time.

Got it. And just regarding acquisitions, are you still considering making acquisitions? I believe at one point, you were looking at pet clinics for potential acquisitions. Is that still viewed as an opportunity, or is that long past?

During normal course of business, we do look at acquisition opportunities. But if something happens obviously, we will let the market know.

Okay. Thank you. That's it for me.

Kevin Ellich, Piper Jaffray.

Mendo, just two quick follow-ups. One was on the M&A, I guess. Could you prioritize your use of cash, given what you guys have on the balance sheet in cash and short-term. And then, the second question was, looking at new customers and new customer sales which has been steadily declining over the last several quarters. I guess, when do you think that is going to turn around, and what is it going to take for you guys to see some improvement in new customer sales?

All I can tell you is, we are running a new campaign in our advertising, and putting more emphasis on database marketing. We will see what happens. Keep in mind, that every customer does not have equal value.

Okay.

So we are attempting to acquire higher value customers.

Yes, it sounds like you guys have been doing the database marketing, and this focus for a while. Have you switched, I guess, the focus on what you are doing over the last several quarters? I mean, how has that changed over the last (multiple speakers)?

Well, I can tell you that our implementation is probably 80% [now], but it is going to be 100% next spring.

Okay. And how long has that been going on in terms of this -- where you are at now, that 80% implementation?

About a year.

Okay. And then, yes, uses of cash or capital?

Well, as you know, we pay dividends. And we have still -- I think $10 million remaining in our stock buyback. As far as M&A is concerned, we are not focused on it. But during the normal course of business, when opportunities arise, we look at them.

Okay. Sounds good. Thank you.

You're welcome.

At this time, we have no additional questions in queue, and I will turn the meeting over to Mr. Akdag.

Thank you. For the remainder of 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.