Petmed Express Inc (PETS) 2017 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 ended on December 31, 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 medication and other health products for dogs and cats direct to the customer.

1-800-PetMeds markets its products through the 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 medication 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. Please go ahead.

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, our 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'll compare our third fiscal quarter and 9 months ended on December 31, 2017, to last year's quarter and 9 months ended on December 31, 2016.

For the third fiscal quarter ended on December 31, 2017, our sales were $60.1 million compared to sales of $52.9 million for the same period the prior year, an increase of 13.7%. For the 9 months ended on December 31, 2017, sales were $206.5 million compared to sales of $186.1 million for the 9 months the last year, an increase of 10.9%. The increases in sales were due to increases in new order and reorder sales. The average order value for the quarter was approximately $86 compared to $81 for the same quarter the prior year.

For the third fiscal quarter, net income was $9.1 million or $0.44 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 88%.

For the 9 months, net income was $27.1 million or $1.33 diluted per share compared to $16.3 million or $0.80 diluted per share a year ago, an increase to net income of 66%.

The accelerated increase in net income was mainly due to higher gross profit margins. In addition, the new tax law helped boost our earnings for the quarter by approximately $1.7 million or $0.08 diluted per share.

New order sales increased by 15.5% to $9.2 million for the quarter compared to $7.9 million for the same period the prior year. For the 9 months, the new order sales increased by 12.7% to $36 million compared to $31.9 million for the same period last year.

Reorder sales increased by 13.4% to $50.9 million for the quarter compared to reorder sales of $44.9 million for the same quarter the prior year. For the 9 months, the reorder sales increased by 10.6% to $170.5 million compared to $154.2 million for the same period a year ago.

We acquired approximately 106,000 new customers in our third fiscal quarter compared to 99,000 for the same period the prior year. And we acquired approximately 408,000 new customers in the 9 months compared to 388,000 for the same period a year ago.

For the quarter, approximately 84% of our sales were generated on our website compared to 83% for the same quarter last year, which resulted in a 15% 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 third fiscal quarter, our gross profit as a percent of sales was 36.5% compared to 31.5% for the same period a year ago. For the 9 months, our gross profit as a percent of sales was 35.3% compared to 30.7% for the 9 months a year ago.

The shift in sales to new-generation medications with higher margin, the trend we have seen in the prior 3 quarters, continued in the December quarter.

Our general and administrative expenses as a percent of sales was 9.7% for the quarter compared to 10.1% for the same quarter of the prior year. And for the 9 months, it was 8.8% compared to 9.2% for the same period a year ago. We were able to leverage the G&A with increased sales.

For the quarter, we spent $4.1 million in advertising compared to $3.2 million for the same quarter the prior year, an increase of 30%. For the 9 months, we spent $14.9 million for advertising compared to $13.3 million for the 9 months a year ago, an increase of 12%. We increased advertising to stimulate new order sales.

Advertising cost of acquiring a customer for the quarter was $39 compared to $32 for the same quarter the prior year. And for the 9 months, it was $37 compared to $34 for the 9 months the prior year. The increase is mainly due to increases in advertising costs.

We had $81 million in cash and cash equivalents and $21.9 million in inventory, with no debt as of December 31, 2017.

Net cash from operations for the 9 months was $35.1 million compared to $31.6 million for the 9 months last year.

Due to the Tax Reform Act of 2017, we are anticipating an effective income tax rate of approximately 34% for the March 2018 quarter and approximately 24% for the next fiscal year.

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

(Operator Instructions) Our first question is coming from Mr. Kevin Ellich from Craig-Hallum.

Mendo, I guess I just wanted to start off with the gross margin. Another really strong quarter. It doesn't seem like we're seeing much seasonality in the business these days. But, I mean, should we start thinking that gross margin is going to continue to expand by 200, 300, 400 basis points each quarter?

During our off-peak season, typically gross margins are higher in the off-peak season than the peak season. So the comparisons are going to get tougher as we go along. So our gross margins increased in the last 4 quarters like 500 basis points, I guess, for the year. So it'll be tougher to continue that going forward.

Got it. I mean, I would think in off-season, you're not seeing as much in terms of the sales of the new generation or next-generation products, but that trend has continued. Would you say that's true?

That is correct, yes. In the flea and tick category, there is a shift in sales from low-margin topicals to higher-margin, next-generation medications. And that's really the main reason for increase in the gross profit margins.

Okay. Yes, that makes sense. And then customer acquisition cost was up about 22% this quarter. Do you think that trend is going to continue? I think you gave the reason being this higher advertising expense?

Yes, there is a cost increase per impression, so I would anticipate that there's going to be some increase compared to the last year.

Okay. Great. And then I guess one quick one for Bruce. Obviously, we were all expecting tax rate to come down in the next calendar year. But can you explain what the benefit was this quarter and how that happened?

Sure. I mean, as you know, we were a full 35% federal taxpayer. What we had been applying has been a 35% rate for the first half of the year, for the first 6 quarters. Once the tax law was enacted, we were allowed to prorate that rate, so we had 9 months at 35%, 1 month at 21%, which was a prorated 31.5%. We were able to apply that to the 9 months, and that's going to be the federal rate moving forward for the fourth quarter. Once our fiscal year ends at March 31, 2018, we'll then apply for that full year of fiscal '19 a 21% federal rate.

Okay. But for fiscal '19, you want us to use 24%?

Right. That's the blended effective rate that includes state tax as well.

Okay, great.

And that includes state income tax.

Okay. One last one for me. Are you seeing any changes in the competitive dynamics or increased competition from any of the other online retailers?

It's similar to the, I would say, prior 2 quarters. It's impacting our cost in advertising a little bit. That's one of the reasons the cost is up in advertising.

Our next question is coming from Erin Wright from Crédit Suisse.

Great. How would you characterize your current relationship with third-party distributors as well as your direct relationships, if any, on the vendor side? I guess have you been able to establish any sort of direct manufacturer relationship? Has anything changed meaningfully on that front to facilitate a, I guess, greater access to a more diverse portfolio?

Our relationships with our vendors are very good, I would say. There is some changes happening, but we may disclose that in our 10-K in May.

Changes as it relates to third-party distribution or manufacturer direct relationship?

Direct relationships. As far as access to products, I mean, we're -- we carry a full line of all the most popular pet medications. So, I mean, access isn't the sole issue. You're just talking about more direct relationships.

Right. Okay, great. And then I guess how -- has anything changed in sort of your advertising strategies since the advertising spend has come up? Or is this just sort of a competitive response to the market at this point?

With higher margins, we can afford to pay more to acquire a customer. So our thresholds have changed a little bit due to the higher margins.

And then on tax reform, I guess I see the dividend hike today. But how should we think about how this will impact your capital deployment priorities overall?

We are in maintenance stage now as far as capital deployment is concerned, as far as our infrastructure is concerned. But during normal course of business, we do look at opportunities. So if something happens, obviously, you guys will hear about it.

Do you anticipate that you'll be active from an M&A standpoint? Are there opportunities in the pipeline out there?

I wouldn't call it an active. I would just say during normal course of business, we always looked at opportunities, and we'll continue to do that.

(Operator Instructions) Our next question is coming from Anthony Lebiedzinski from Sidoti & Company.

So obviously, you've had a few quarters of very positive shifts towards the higher-margin, next-generation medications. Do you have any sense, Mendo, as to what percentage of your customers have already made that shift to the next-generation medications?

We do have some sense, but I'm not going to share that with you. So I think the shift probably will continue for another couple years.

Okay, great. And I was wondering if you could provide any sort of sense as to how much of your sales are coming from your mobile app. And are there any planned improvements to the app that could perhaps make it even easier to customers to order?

We are working on the second generation of the app, which should go live, I believe, within the next 6 weeks. It's growing, but it's still not -- it's -- still it's in the infancy. But as the consumer using more and more of the mobile phones, we think it's going to be important for the future.

As there are no further questions in queue at this time, I would like to hand the call over to the speakers. Go ahead.

Thank you.

For the remainder of fiscal 2018, we'll continue to -- focusing 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.

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