Petmed Express Inc (PETS) 2015 Q3 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 third fiscal quarter that ended on December 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 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 aimed 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'd like to turn the call over to the Company's Chief Financial Officer, Mr. Bruce Rosenbloom. Sir, you may begin.

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 and thank you for joining us. Today we will review the highlights of our financial results. We will compare our third fiscal quarter and nine months ended on December 31, 2015 to last year's quarter end nine months ended on December 31, 2014.

For the third fiscal quarter ended on December 31, 2015, sales were $50.9 million compared to sales of $49.3 million for the same period the prior year, an increase of 3.3%. For the nine months ended on December 31, 2015, sales were relatively flat at $179.3 million compared to sales of $179.4 million for the nine months the prior year. The increase in sales for the quarter was due to increases in new order and reorder sales. The average order value for the quarter was approximately $78 compared to $76 for the same quarter the prior year.

For the third fiscal quarter, net income was $4.9 million or $0.24 diluted per share compared to $4.8 million or $0.24 diluted per share for the same quarter the prior year, an increase to net income of 1.9%. For the nine months, net income was $15.1 million or $0.75 diluted per share compared to, excluding a one-time charge for a discontinued project, $13.6 million or $0.67 diluted per share a year ago, an increase to net income of 12%.

Reorder sales increased by 2.8% to $43.3 million for the quarter compared to reorder sales of $42.2 million for the same quarter the prior year. For the nine months, the reorder sales increased by 1.6% to $149.6 million compared to $147.2 million for the same period a year ago.

New order sales increased by 6.8% to $7.6 million for the quarter compared to $7.1 million for the same period the prior year. For the nine months, the new order sales decreased by 7.5% to $29.7 million compared to $32.2 million for the same period last year.

We acquired approximately 98,000 new customers in our third fiscal quarter compared to 96,000 for the same period the prior year. And we acquired approximately 374,000 new customers in the nine months compared to 432,000 for the same period a year ago.

For the quarter, approximately 81% of our sales were generated on our website compared to 80% for the same quarter last year. The seasonality in our business is due to the proportion of flea, tick and heartworm medicine 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 32.9% compared to 34.7% for the same period a year ago. For the nine months our gross profit as a percent of sales was 32.7% compared to 33.1% for the nine months a year ago. The percentage decrease for the quarter can be attributed to a more aggressive pricing and increases in product costs on certain brands.

Our general and administrative expenses were relatively flat for the quarter and the six months. For the quarter, we spent $4 million in advertising compared to $4.3 million for the same quarter the prior year. For the nine months, we spent $18.1 million for advertising compared to $21.1 million for the nine months the prior year.

Advertising costs of acquiring a customer for the quarter was $41 compared to $45 for the same quarter the prior year. And for the nine months, it was the same, $49, compared to the nine months the prior year.

We had $62.7 million in cash and short-term investments and $18.9 million in inventory with no debt as of December 31, 2015. Net cash from operations for the nine months was $22.6 million compared to $29.5 million for the nine months the prior year. The decrease was mainly due to a smaller reduction in inventory compared to the last year.

On January 19, 2016, we completed the purchase of the property located in Delray Beach, Florida. The purchase price was $18.5 million.

The property is approximately 14.6 acres with two buildings totaling approximately 185,000 square feet. There are currently two tenants occupying about 88,000 square feet. We intend to occupy the remaining 97,000 square feet later this year as our principal offices and distribution center.

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

(Operator Instructions)

Our first question came from the line of Kevin Ellich of Piper Jaffrey.

Good morning. Just a few questions, Mendo. Starting off with gross margin, could you talk about your comment about more aggressive pricing? Which products are you becoming more aggressive in your pricing? And is that something you plan to continue?

And then, on the other hand, which products are you seeing cost increases that affected your gross margin during the quarter?

We were aggressive with our pricing overall. We're not going to get into the specifics of the brands that the cost increase. There were some discounts available to us on certain brands last December a year ago and it was unavailable this year. But we're not going to get into the specifics. Also, we had higher sales in the flea category which has lower margins.

Okay. And would those be branded flea products or generic or both?

Both.

Okay, great. And then the comments on unseasonably warm weather, which we all saw in the December quarter, just to make sure that I understand it correctly, that's helping because when the weather is warmer people are still using flea and tick medication? Is that the right way? And other parasiticides?

That is correct, yes.

Okay. So, that's really a one-time benefit that you got this quarter that we really won't see in the next quarter.

Depends on the weather.

Right. I think you guys have gotten -- well, there's some snow in the Northeast and what-not. And also Nashville, right? They got pummeled with snow, too. So, then, going on to the new facility and the property purchase, congratulations on that.

Thank you.

What's the timing of when you plan to move into that building? I don't know if Bruce could add, what's the cost associated with moving the headquarters and your distribution center? Will you keep your other facility up and running? How does that work?

And then, also, you mentioned two tenants occupying, I think, 88,000 square feet. Will you be collecting rental income from them or lease payments?

Yes, we will be collecting lease payments from them. We intend to move later this year. It will probably be later, probably either September, November, somewhere around those lines when the property's ready for our operation.

Okay. And is there any cost, like higher G&A associated with that, Bruce?

There will be some costs associated with the move but we don't really think it will be anything that's too material going forward. We don't expect it to be.

Okay. And then on the lease payments, anything that you could call out in terms of, will that show up in your other income line, and will it be meaningful?

It will be meaningful and it will show up below the line, correct, in other income. There will also be some expenses associated with it, as well.

Okay. And then lastly, Mendo, with the presidential election coming up here, will we continue to see a greater shift to more online advertising? How do you guys think about the split? You've done a great job of managing your advertising spend relative to our expectations. Just wanted to see what you're seeing in the remnant market and how you plan to manage this as advertising costs could go up.

We're becoming less dependent on television, we're moving from, really, mass marketing towards one-to-one marketing. We anticipate that trend is going to continue, so we're not expecting a significant impact.

Okay, great. Thanks again.

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

Thank you. Impressive quarter as far as I was concerned because, looking back in my model, you have to go back to 2006 to see an advertising cost line as low as it was that you reported in this quarter, when the business was half the size. And I also see the big reduction in the gross margin, so I see the tradeoff that you're making here. But just how is that possible that you can continue to reduce advertising and maintain or grow your top line?

We were more efficient. We got higher response to our advertising. And, as I pointed out, we're doing more database marketing, more one-to-one compared to mass marketing that we used to do in the past. So, I think that's helping us.

What is that that you're talking about, the one-to-one marketing?

Personalized marketing.

So, your customer base or a larger customer base, a larger pool of customers that you --?

More relevance, more personalized, is all I'm going to tell you, both to, our, obviously, customer database and also to any inquiries, any potential customer.

And in order to put this quarter into context, it being warmer, unseasonably warm in the Q3 time period, what did that contribute to the flea and tick sales? How much of a driver was that in the quarter?

It was a significant driver.

Okay, good. And then inventories, can you comment about the ability to be opportunistic in this time period on both the flea and tick and the other side of the business, the prescription side?

Opportunities come and go and we'll take advantage of them when they're there. So, nothing really different from previous years so far this year.

That's what I wanted to hear. Thank you very much, appreciate it.

(Operator Instructions)

Our next question came from the line of Anthony Lebiedzinski of Sidoti & Company.

Yes, good morning. Thank you for taking the question.

First, on the new order sales, was that driven mostly by flea and tick? Or maybe if you could just shed some color on that. I know, looking back a year ago, your new order sales were down 7.5%, so just wondering how much did the easy comparison also help you achieve a meaningful sales increase.

The flea and tick helps, so we had pretty nice size of growth in the flea category overall. That's helped the new orders and the reorders.

Okay, got it. And as far as the new facility that you will move into later this year, maybe, Bruce, can you help us understand what's the incremental depreciation expense that we should be looking for? And as far as the lease payments, how do we model that in the other income? If you could just quantify anything, that would certainly help us. Thank you.

We're predicting, again, at this point, we're still working through our estimates but we've got a fairly good hold on the numbers and we feel that the additional incremental revenue that we're going to receive is going to be very similar to the offset to depreciation, the increase in depreciation.

Okay. What's the average life of the building as far as -- are you going to be depreciating that over 20 years? What's the time frame?

It's somewhere in that range. We're not really going to go into those specifics right now. We'll have more color in our next conference call for year end. We just closed on the building recently. But that's probably right, maybe a little bit more than 20 years, but we'll get those specifics down the road.

Got it. Okay, thank you.

Thank you. Our final question is from Mitch Bartlett of Craig-Hallum.

Bruce, just to follow on, on that conversation, you spent this money on the distribution facility largely because you could lower your cost by doing so, is that a fair statement? Will you lower your cost, operating cost, apart from all the other cash outlay?

Yes. Long term that's definitely the goal. There will definitely be a financial advantage to us. But there are also some other -- there will also be some expenses, at least in the short run, as well, that we're going to have to take on with this facility. But net-net we should be in a better financial position long term.

Short term up, long term down on operating, is what I heard you say.

Yes, that's reasonable.

Very good. Thanks. Appreciate it.

Thank you. At this point we don't have any questions on queue. I would now like to hand the call back to Mendo Akdag.

Thank you. Going forward, 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.