Petmed Express Inc (PETS) 2016 Q1 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 first fiscal quarter that ended on June 30, 2016. 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 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'd 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've 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, everyone, and thank you for joining us.

Today, we will review the highlights of our financial results. We will compare our first fiscal quarter, ended on June 30, 2016, to last year's quarter ended on June 30, 2015.

For the first fiscal quarter, ended on June 30, 2016, sales were $72.5 million, compared to sales of $71.6 million for the same period the prior year, an increase of 1.2%. The increase was due to increases in new order sales. Our average order value was approximately the same, $82 for the quarter, compared to the same quarter last year.

For the first fiscal quarter, net income was $6.6 million, or $0.32 diluted per share, compared to $5.8 million, or $0.29 diluted per share for the same quarter last year, an increase to net income of 15%. New order sales increased by 10% to $13.3 million for the quarter, compared to $12.1 million for the same quarter the prior year. Reorder sales were slightly down to $59.2 million for the quarter, compared to reorder sales of $59.6 million for the same quarter last year.

We acquired approximately 158,000 new customers in our first fiscal quarter, compared to 148,000 for the same period the prior year. Approximately 82% of our sales were generated on our website for the quarter, compared to 81% for the same period 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 first fiscal quarter, our gross profit as a percent of sales was 31%, compared to 32.1% for the same period a year ago. The decrease was due to increases in product costs on certain brands, and additional discounts given to customers to increase sales.

Our general and administrative expenses as a percent of sales was slightly up to 8.4% compared to 8.1% for the same period last year. We spent $5.8 million in advertising for the quarter, compared to $7.9 million for the same quarter the prior year, a decrease of about 27%. The advertising cost of acquiring a customer was approximately $37, compared to $53 for the same quarter the prior year. We were much more efficient compared to last year.

We had $44.3 million in cash and cash equivalents, and $27 million in inventory, with no debt as of June 30, 2016. Net cash from operations for the quarter was $13.1 million, compared to $10.8 million for the same period last year. This ends the financial review.

Operator, we are ready to take questions.

(Operator Instructions)

Erin Wilson, Credit Suisse.

Thanks for taking my question. What sort of visibility do you have on advertising spending on a quarterly basis? Is this some sort of run rate that you expect going forward? It seems that the new strategies are working for you. How much lower can advertising spending go from here?

Our estimate is going to be about 8% for the fiscal year. We discontinued some advertising that was not cost effective.

Okay. And can you speak a little bit to your new strategies now? What did you eliminate, specifically, from that advertising strategy that you mentioned? And what is the focus now, from a strategy standpoint?

Mainly we eliminated television advertising, and we switched some dollars to online and print.

Okay. Great. And the gross profit trend, what is the primary factors driving that. I guess it is promotional activity, but what were you doing this year, or this quarter, that you weren't doing last year? And should that trend reverse in the coming quarter?

Just more aggressive pricing.

And how should we anticipate the quarterly progression of the gross margin trend?

We are anticipating continuing pressure on major brand margins, but we may be able to make some of it up on the advertising line.

Okay. Thank you.

Anthony Lebiedzinski, Sidoti & Company.

Mendo, just to follow-up, as far as the advertising commentary, 8% of sales is I think what you expect, I assume that the quarterly variations will be there in the off season, you probably will be able to spend more effectively. Is that the right way to think about it?

Yes. The quarterly variations will continue. The 8% number I gave you was for the fiscal year.

Got it. Okay. As far as the gross margins, you talked about increasing the discounting on the branded products, can you give us a sense as to how some of your private labels are doing, or generics, any color as regards to those products would be helpful.

On generics the gross margins are much higher than for the brands, if that's what you're asking.

Yes. I do realize that, but can you talk about what the sales trends you're seeing, and those items?

Actually, generic sales were down for the quarter compared to last year.

Any particular reason why you think that, that was the case?

Well, topical-brand sales were down too, so it's following that trend.

Got it. Okay. And lastly, can you discuss the impact of weather, if anything had on your business? I think the March quarter you guys talked about some pull forward of demand because of the weather. If you could address that, that would be great.

We had unusually strong, especially reorder sales and new order sales in the March quarter, which might have taken away some sales from the June quarter.

Okay. All right. Thank you very much.

(Operator instructions)

Mitch Bartlett, Craig-Hallum.

Another very impressive quarter on advertising.

Thank you.

In response to the previous question, that you eliminated all TV-based advertising, or just continued to reduce it?

Eliminated. Yes. That's what I said.

Wow. So you are the poster child for the efficiency of online versus TV. Very impressive. And so your competitors haven't duplicated this channel, or your specific approach, or are other competitors starting to mimic your advertising strategies? Anything you could talk about on that?

They have been, so they have been for a while now, so I wouldn't say they didn't accept television.

Okay. And do you see the trend longer term? I know you've answered this already, but longer trend of continuing to maybe give more on price as an alternative to advertising? So over a three-five year period could we see more gross margin erosion and better efficiency on the advertising line, like you've seen over the last few years?

Probably. Yes. The market is more competitive, so we have price-wise, we have to be competitive with our more aggressive pricing, had a positive impact, especially on our new-order sales.

Very good. Thank you.

Erin Wilson, Credit Suisse.

Can you speak to potential relationships with companies that source. Is that helping or potentially hurting you from a competitive standpoint?

We're not coming across them, so our guess is that it's not impacting us either way.

And can you speak to the dynamics across the flea and tick, or parasiticide market, with the proliferation of new prescription-only medications. You mentioned the topicals were down, I guess that's expected, but anything else you could comment about the underlying health of that industry for you?

There are new products. There are new pills coming into the market, and the pill section is growing.

Do you have access to those?

Yes, we do.

Okay. Thank you.

Michael Kupinski, Noble Financial.

Going back to the question about advertising, many companies have used more of an omni approach to their advertising, and in the case of television, tends to keep the brand awareness out there. Was wondering if by eliminating television, have you determined that you would not go back to television, or do you think that at some point you could re-emerge a program at least to keep some advertising on television?

At some point we may go back. We're going to follow the data, so we may test some and see what kind of results we get. And continue accordingly.

Okay. That's all I had. Thank you.

Mitch Bartlett, Craig-Hallum.

Sorry, I forgot to ask the most important follow along on the advertising efficiency. If it is so efficient, why not spend more? Why not double down? What is the size of these channels that you can access? Are they enough to put considerable resources behind?

We are maximizing the most cost-effective advertising, so we're already doing that.

If you were to increase your advertising by 30%, 40%, would the cost of customer acquisition spike pretty dramatically?

Most likely, yes.

Thank you very much.

That's our last question. I would like to turn the call over back to Mr. Mendo Akdag.

Thank you. We are currently preparing to move into our new corporate headquarters and distribution center, which is expected to occur in our third fiscal quarter. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call.

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