Petmed Express Inc (PETS) 2017 Q2 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 second quarter fiscal quarter ended on September 30, 2017. 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 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. 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 6 months ended on September 30, 2017, to last year's quarter and 6 months ended on September 30, 2016.

For the second fiscal quarter ended on September 30, 2017, our sales were $66.7 million compared to $60.8 million for the same period the prior year, an increase of 9.7%. For the 6 months ended on September 30, 2017, sales were $146.4 million compared to $133.3 million for the 6 months the prior year, an increase of 9.8%. The increases in sales were due to increases in new order and reorder sales. The average order value was approximately $85 for the quarter compared to $82 for the same period last year.

For the second fiscal quarter, net income was $8.8 million or $0.43 diluted per share compared to $4.9 million or $0.24 diluted per share for the same quarter the prior year, an increase to net income of 79%. And for the 6 months, net income was $18 million or $0.88 diluted per share compared to $11.5 million or $0.56 diluted per share a year ago, an increase to net income of 57%. The accelerated increase in net income was mainly due to higher gross profit margins. And during the quarter, there was an income tax benefit of approximately $800,000 or $0.04 diluted per share, related to stock-based compensation.

New order sales increased by 8.8% to $11.6 million for the quarter compared to $10.7 million for the same period the prior year. For the 6 months, the new order sales increased by 11.7% to $26.8 million compared to $24 million for the same period last year.

Reorder sales increased by 9.9% to $55.1 million for the quarter compared to reorder sales of $50.1 million for the same quarter the prior year. For the 6 months, the reorder sales increased by 9.4% to $119.5 million compared to $109.3 million for the same period last year.

We acquired approximately 134,000 new customers in our second fiscal quarter compared to 131,000 for the same period the prior year. And we acquired approximately 302,000 new customers in the 6 months compared to 289,000 for the same period a year ago.

Approximately 84% of our sales were generated on our website for the quarter compared to 82% for the same period the prior year, which resulted in a 12.3% 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-seasons.

For the second fiscal quarter, our gross profit as a percent of sales was 35.2% compared to 29.7% for the same period the prior year. And for the 6 months, our gross profit as a percent of sales was 34.8% compared to 30.4% for the same period a year ago. The shift in sales to higher-margin items in the flea, tick and heartworm categories, the trend we have seen in the last 2 quarters, continued in the September quarter.

Our general and administrative expenses as a percent of sales was down to 9.3% compared to 9.5% for the same quarter last year. And for the 6 months, it was 8.5% compared to 8.9% for the 6 months the prior year. We were able to leverage the G&A with increased sales.

For the quarter, we spent $4.5 million in advertising compared to $4.4 million for the same quarter the prior year. For the 6 months, we spent $10.8 million in advertising compared to $10.1 million for the 6 months a year ago. The advertising cost of acquiring a customer was approximately $34 for the quarter compared to $33 for the same quarter of the prior year. And for the 6 months, it was $36 compared to $35 for the 6 months last year. We had $68.4 million in cash and cash equivalents and $23 million in inventory with no debt as of September 30, 2017.

Net cash from operations for the 6 months was $18.3 million compared to $27.8 million for the same period last year. The decrease was mainly due to increases in inventory.

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

(Operator Instructions) And our first question comes from the line of Kevin Ellich from Craig-Hallum.

Mendo, I guess I want to start off with the gross margin strength. Can you give us a little bit more color as to what's driving that? Are we talking specifically about the oral flea and tick products? And then can you give us a breakdown of your mix of prescription versus OTC?

The main driver is there's a shift from topicals, which have low margins, to oral medications in the flea and tick category. And the prescriptions are the majority of the business.

I mean, are we talking 51% or 75% now?

We're not going to disclose that.

Okay. And then can you talk about -- did you see any impact from the hurricane in terms of impact on your sales or costs of having to put in extra overtime and things like that?

We see some impact, negative impact, on sales. It's difficult to quantify. It probably impacted more of the new orders.

More on new orders, okay, great. And then one thing on the balance sheet, I saw payables was down about $6 million sequentially, a positive impact on your cash flow. Bruce, do you have any color on what was going on with payables this quarter?

No, I mean, we're timing. Inventory and payables is more timing with our company, so no further comment on that.

Okay. And then what about the tax rate going forward? Should we use this level or is it going to bounce back to the 37% rate you guys have been historically at?

Right, as you know, we had a onetime tax benefit around $800,000 in the quarter due to the difference between the fair market price of the shares at grant date versus the actual price of investing. So we may have something similar in the March quarter as well. It's probably somewhere in the middle.

It depends on the stock price.

It really does.

Okay, got it. And then 2 last ones, new customer transaction size, looks like it was up over 6% again this quarter. Should we expect that to continue? Do you think that's really due to the new products? And just what are you guys seeing in the market? And then lastly, Mendo, any thoughts on potential competition? I saw something out of PetSmart a few weeks ago. I'm wondering what you think about the competition on the horizon.

We anticipate spending more on advertising, so we'll see what happens. As far as the PetSmart pharmacy's [closure], based on our numbers, we have not seen any material impact so far. So we'll see what happens. Also, they've been in the pharmacy business for a few years through a subsidiary. I guess, it appears they're rebranding.

And our next question is from the line of Erin Wright from Crédit Suisse.

Given sort of the seasonality across the business, how should we be thinking about the quarterly progression of the gross margin trend in the coming quarters ahead of potentially the slower flea and tick months?

It appears the gross margin improvement is going to continue compared to last year, I should say. But it's going to depend on also how the competition behaves price-wise.

I guess, in what other drivers outside of flea and tick could be, I guess, offsetting in the event there is a slowdown with the seasonal progression -- or typical slowdown?

You're talking about the gross margins?

That's correct.

Well, historically, the flea and tick category had the lowest gross margins, so if the mix is less of flea and tick, that doesn't necessarily mean it will negatively impact gross margin.

Okay. And then you've had success, I guess, it seems with the chewable flea and tick medication. Does that, I guess -- how sustainable is that or how is your access to those types of products?

We do have access to them. There's no problem from that perspective. There's a shift to oral medications from topicals.

Any sort of changes from a supply chain standpoint in terms of your relationships with distributors or even directly with manufacturers?

There is -- I would say there is no material change at this time.

(Operator Instructions) And our next question is from the line of Anthony Lebiedzinski from Sidoti & Company.

So as far as the gross margin expansion, the other category that you highlighted was the heartworm category. Can you speak to that a little bit more specifically, what you're seeing there? And any further color on that, and I have a...

It's just the category is growing.

Okay. Okay, and then as far as the new order sales growth, it decelerated sequentially from the June quarter. Anything to read into that, or is it just maybe some timing perhaps of your advertising spending? Anything you can add on that?

The hurricanes might have had a negative impact, especially on new orders, less on reorders. And also, we didn't -- we spent about -- it was relative -- our spending on advertising was relatively flat compared to the same quarter last year.

Got it, okay. Any -- I may have missed this, but any sort of -- as far as impacts from the hurricanes that you could cite to?

It's difficult to quantify, but there were some negative impact, probably more on new orders and less on reorders.

Got it, okay. And then, Bruce, just wanted to clarify. So the tax issue that was related to ASU 2016-09. Is that -- what that's in reference to?

Yes.

And our next question comes from the line of Erin Wright from Crédit Suisse.

Just a quick follow-up on the advertising spend. I guess, can you speak to kind of how your strategy has evolved in terms of the advertising over the past kind of year and what you anticipate kind of in the coming quarters? I think you previously said that it should increase year-over-year. I guess is that still the case?

Yes, I would say that's still the case. We anticipate that we're going to spend more on advertising compared to the last fiscal year.

And I guess, I was -- okay. I was just going to ask how the strategy sort of has evolved over the last year.

It's a -- I would say it's similar to last year's. We're doing a little bit more targeted advertising, but it's similar to, I would say, last fiscal year. We're just doing more of it.

And at this time, we do not have any questions on queue. Speakers, you may begin.

Thank you. For the remainder of fiscal 2018, we'll continue to focus on increasing sales and improving our service levels.

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.