Petmed Express Inc (PETS) 2016 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, 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 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 medication 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 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 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'll compare our third fiscal quarter and nine months ended on December 31, 2016 to last year's quarter and nine months ended on December 31, 2015. Before we get to the financials, I'm pleased to report that in December 2016 we completed the move to our new corporate headquarters and distribution center in Delray Beach.

For the third fiscal quarter ended on December 31, 2016, our sales were $52.9 million compared to sales of $50.9 million for the same period the prior year, an increase of 3.8%. For the nine months ended on December 31, 2016, sales were $186.1 million compared to sales of $179.3 million for the nine months the prior year. Again, an increase of 3.8%.

The increases in sales were due to increases in new order and reorder sales. The average order value for the quarter was approximately $81 compared to $78 for the same quarter the prior year.

For the third fiscal quarter, net income was $4.8 million or $0.24 diluted per share compared to $4.9 million or $0.24 diluted per share for the same quarter the prior year, a decrease to net income of 1.4%. For the nine months, net income was $16.3 million or $0.80 diluted per share compared to $15.1 million or $0.75 diluted per share a year ago, an increase to net income of 7.7%. The net income for the quarter was impacted by one-time expenses of approximately $125,000 related to the move and a $96,000 income tax true-up for the prior fiscal year.

New order sales increased by 4.4% to $7.9 million for the quarter compared to $7.6 million for the same period the prior year. For the nine months, the new order sales increased by 7.4% to $31.9 million compared to $29.7 million for the same period last year.

Reorder sales increased by 3.7% to $44.9 million for the quarter compared to reorder sales of $43.3 million for the same quarter the prior year. For the nine months, reorder sales increased by 3.1% to $154.2 million compared to $149.6 million for the same period a year ago.

We acquired approximately 99,000 new customers in our third fiscal quarter compared to 98,000 for the same period the prior year. And we acquired approximately 388,000 new customers in the nine months compared to 374,000 for the same period a year ago. For the quarter, approximately 83% of our sales were generated on our website compared to 81% for the same quarter last year, which resulted in a 5.6% increase in online sales.

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 third fiscal quarter, our gross profit as a percent of sales was 31.5% compared to 32.9% for the same period a year ago. For the nine months, our gross profit as a percent of sales was 30.7% compared to 32.7% for the nine months a year ago. The percentage decreases were 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 10.1% for the quarter compared to 9.8% for the same quarter the prior year. And for the nine months, it was 9.2% compared to 9% for the same period a year ago. One-time expenses related to the move were approximately $125,000, about 2 basis points for the quarter.

For the quarter we spent $3.2 million in advertising, compared to $4 million for the same quarter the prior year. For the nine months we spent $13.3 million for advertising compared to $18.1 million for the nine months a year ago. Advertising costs of acquiring a customer for the quarter was $32 compared to $41 for the same quarter the prior year. And for the nine months, it was $34 compared to $49 for the nine months the prior year.

We had $47.9 million in cash and cash equivalents and $14.9 million in inventory with no debt as of December 31, 2016. Net cash from operations for the nine months was $31.6 million compared to $22.6 million for the nine months last year. The increase was mainly due to decreases in inventory. For the nine months we spent $9.9 million in property and equipment, updating our infrastructure in our new facility.

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

Thank you. We'll now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Erin Wilson, Credit Suisse. Your line is now open.

Thanks for taking my questions. Can you explain some of the dynamics influencing the gross margin trend? You mentioned some additional discounts and promotional activity. How should we think about that trend going forward? Will it improve?

Are you seeing any changes there? If you can explain the dynamics that would be great. Thanks.

Going forward we would anticipate that gross margins should stabilize or the drop should not be as dramatic as you have seen in the last few quarters, with a caveat that it will also depend on how the competition behaves price-wise.

And on the competitive landscape, how would you characterize it currently, especially with some of the specialty retail customers taking a more omnichannel approach? And then also you have a consolidating manufacturer base. If you could comment on those two dynamics, that would be great. Thanks.

Over-the-counter products are very competitive. The market is crowded. But there's also a shift to new-generation medications.

Okay. And are you seeing an uptick or an early uptick in any flea, tick or heartworm sales at this point?

I would say it's probably similar to last year so far.

Okay. All right. Thank you so much.

Thank you. Our next question comes from Anthony Lebiedzinski, Sidoti & Company. Your line is now open.

Good morning. Thank you for taking the questions. Clearly, you're looking at new customer acquisition costs and other decline. My question is, is this really as good as it gets in terms of new customer acquisition costs or are there any other levers you can pull? Obviously you eliminated TV advertising about a year ago. What are your thoughts going forward on that, please?

We will do some testing, but we'll see what the numbers come at. So, we'll follow the data. At this point it appears it will be similar to what you have seen in the last few quarters, again, with a caveat that obvious if any new competition enters the market could be impacted.

Got it. Okay. As far as the AOV gains, the average owner value, what do you attribute that to? Are you seeing more gains on the Rx side versus OTC or is consistent in both segments?

I can tell you that there's a shift to higher-priced items, which are really new-generation medications.

Okay. And, lastly, just a couple of line items from your income statement. Obviously with the new facility your depreciation expenses have gone up, plus your other income. Is this the way we should think about a new quarterly run rate? Any help with that would be certainly helpful. Thank you.

Depreciation will probably be about $0.5 million a quarter, about $2 million a year, but it will be offset by elimination of the lease expense for our old facility and also by the lease income.

Okay. So, the lease income, all of that goes into the other income line?

Yes.

So, it's roughly $130,000 per quarter? Is that a fair number to expect?

No, there is advertising income in that number, too.

Okay. All right. I'll touch base later with Bruce maybe. All right, thanks.

Thank you. Our next question comes from Jeffrey Hoffman, Marathon Partners. Your line is now open.

Great, thank you for taking my questions. Can you just explain what might be happening with inventory as it's declined over the past few quarters?

We're being more efficient. Our inventory will fluctuate based on the promotional buying opportunities. So, we were able to reduce it in the last two quarters.

Do you believe that is more of a sustainable buying opportunity going forward?

It depends on if there are any promotional buying opportunities that requires us to buy in advance. Obviously we will take advantage of that and that will increase the inventory. So, it's difficult to tell.

Perfect. Thank you so much.

Thank you. Our next question comes from George Baxter, Sabrepoint Capital. Your line is now open.

My question's been answered. Thank you.

(Operator Instructions)

At this time we show no questions in queue.

Thank you. We are currently focusing on improving our operational efficiency in our new facility. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call. Thank you.

Thank you for participating. You may disconnect now.