U.S. Markets open in 14 mins

Edited Transcript of PETS earnings conference call or presentation 23-Jul-18 12:30pm GMT

Q1 2018 Petmed Express Inc Earnings Call

Pompano Beach Jul 24, 2018 (Thomson StreetEvents) -- Edited Transcript of Petmed Express Inc earnings conference call or presentation Monday, July 23, 2018 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Bruce S. Rosenbloom

PetMed Express, Inc. - CFO & Treasurer

* Menderes Akdag

PetMed Express, Inc. - CEO, President & Director

================================================================================

Conference Call Participants

================================================================================

* Anthony Chester Lebiedzinski

Sidoti & Company, LLC - Equity Analyst

* David Michael Westenberg

CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst

* Erin Elizabeth Wilson Wright

Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst

* Kevin Kim Ellich

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to the PetMed Express, Inc. doing business as 1-800-PetMeds conference call to review the financial results for the first fiscal quarter ended on June 30, 2018. 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 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.

--------------------------------------------------------------------------------

Bruce S. Rosenbloom, PetMed Express, Inc. - CFO & Treasurer [2]

--------------------------------------------------------------------------------

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?

--------------------------------------------------------------------------------

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [3]

--------------------------------------------------------------------------------

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 first fiscal quarter ended on June 30, 2018, to last year's quarter ended on June 30, 2017.

For the first fiscal quarter ended on June 30, 2018, sales were $87.4 million compared to sales of $79.7 million for the same period the prior year, an increase of 10%. The increase in sales was due to increases in new order and reorder sales. Our average order value was approximately $90 for the quarter compared to $87 for the same quarter last year. For the first fiscal quarter, net income was $12.6 million or $0.62 diluted per share compared to $9.3 million or $0.45 diluted per share for the same quarter last year, an increase to net income of 36%. In addition to increased sales, the Tax Reform Act of 2017 helped boost our earnings.

New order sales increased by 4.6% to $15.9 million for the quarter compared to $15.2 million for the same quarter the prior year. Reorder sales increased by 11% to $71.5 million for the quarter compared to reorder sales of $64.5 million for the same quarter last year. We acquired approximately 169,000 new customers in our first fiscal quarter, similar to the same period the prior year. Approximately 85% of our sales were generated on our website for the quarter compared to 84% for the same period last year, which resulted in a 12% increase in ROI sales for the quarter. 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 34.3% compared to 34.5% for the same period a year ago. The slight decrease was due to additional discounts given to customers to increase sales, which resulted in a $2.5 million increase in gross profit for the quarter.

Our general and administrative expenses as a percent of sales was relatively flat at 7.9% compared to 7.8% for the same period last year. We spent $6.7 million in advertising for the quarter compared to $6.3 million for the same quarter the prior year, an increase of 6.6%. The advertising cost to acquiring a customer was approximately $40 compared to $37 for the same quarter a year ago. The increase was due to increases in advertising costs. We had $94.6 million in cash and cash equivalents and $25 million in inventory, with no debt as of June 30, 2018.

Net cash from operations for the quarter was $22 million compared to $13.9 million for the same period last year. The majority of the increase was due to increases in payables and net income. This ends the financial review.

Operator, we are ready to take questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Kevin Ellich from Craig-Hallum.

--------------------------------------------------------------------------------

Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

--------------------------------------------------------------------------------

Mendo, thanks for the comment on gross margins, which we were -- we were a little caught off guard that it was down versus up this year. Are you seeing any changes in buying patterns for the newer and next-generation products that you called out in the past like oral flea and tick medications or is that still going strong? And could you give us any detail or color behind that?

--------------------------------------------------------------------------------

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [3]

--------------------------------------------------------------------------------

That is still going strong. The market was more competitive, so we've given additional discounts to customers to stimulate sales.

--------------------------------------------------------------------------------

Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

--------------------------------------------------------------------------------

And when you say the market is more competitive, are you talking about more competitive from online competitors? Or is it really brick-and-mortar? Or just in general?

--------------------------------------------------------------------------------

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [5]

--------------------------------------------------------------------------------

More online, more smaller players have reduced their prices significantly. So we're comfortable currently with our current pricing. We're competitive.

--------------------------------------------------------------------------------

Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

--------------------------------------------------------------------------------

Okay. And are -- with that increased competition, are you still offering discounts? And do you plan to continue to offer those going forward?

--------------------------------------------------------------------------------

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [7]

--------------------------------------------------------------------------------

I mean, the market conditions is going to dictate that. Probably, we will.

--------------------------------------------------------------------------------

Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [8]

--------------------------------------------------------------------------------

Okay, got it. And then, I guess, maybe that explains when we look at the revenue, which was up nicely and with reorder sales up strong, 11%. New order sales of 4.6% was a little lower than expected. Is that -- obviously, you had a tough comp from last year but is that really due to the competitive landscape?

--------------------------------------------------------------------------------

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [9]

--------------------------------------------------------------------------------

The cost is up, so advertising cost is up. That's the main reason for the acquisition cost increase. And as far as gross profits are concerned, we are more focused on gross profit dollars, which were up $2.5 million compared to the last quarters.

--------------------------------------------------------------------------------

Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [10]

--------------------------------------------------------------------------------

Okay. And then with advertising costs up and that $40 new customer acquisition cost, is that -- should we continue to think it's going to be $40 or in that range for the rest of the year?

--------------------------------------------------------------------------------

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [11]

--------------------------------------------------------------------------------

Probably. That would probably be a good assumption.

--------------------------------------------------------------------------------

Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [12]

--------------------------------------------------------------------------------

Okay. And then one more for you before I flip to Bruce. Cash, you obviously have a lot of cash now in the balance sheet, which has been building. And you increased the dividend nicely. Other thoughts on using that cash and your capital allocation strategy?

--------------------------------------------------------------------------------

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [13]

--------------------------------------------------------------------------------

We don't have any specific plans at this time. As you know, we paid dividends. We increased the dividend by $0.02.

--------------------------------------------------------------------------------

Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [14]

--------------------------------------------------------------------------------

Got you. And then, Bruce, really quickly. The cash flow is strong, up $22 million. Noticed accounts payable was $5.9 million sorted for cash. Is that just timing on when some bills are paid? Or I guess, how should we think about changes in working capital?

--------------------------------------------------------------------------------

Bruce S. Rosenbloom, PetMed Express, Inc. - CFO & Treasurer [15]

--------------------------------------------------------------------------------

Yes. That's probably right. I mean, obviously, payables is pretty much made up predominantly of both suppliers and advertising, suppliers as well. Yes, more timing than anything. But I think that's something that will be somewhat consistent. That payables number should be somewhat consistent moving forward.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Our next question comes from Erin Wright from Crédit Suisse.

--------------------------------------------------------------------------------

Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [17]

--------------------------------------------------------------------------------

I guess, can you provide an update on your distributor relationship? How much of your prescription product is going through the premarket channel versus what you're sourcing today, if any, direct from manufacturers? I guess, on both the prescription and the over-the-counter products as well.

--------------------------------------------------------------------------------

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [18]

--------------------------------------------------------------------------------

I -- we really don't have anything to add to what we disclosed in our 10-K. I suggest you look at our 10-K. Our lender relationships are proprietary and confidential, and I'm not at liberty to discuss it.

--------------------------------------------------------------------------------

Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [19]

--------------------------------------------------------------------------------

Great. Well, that's fair. The -- I guess, from a profit perspective, it seems that you're starting to lap, I guess, some of the benefits from the higher margin parasiticide products. I guess, how should we think about that quarterly progression of the gross margin trend? And are there any new products that could be offsetting on the horizon that you're seeing?

--------------------------------------------------------------------------------

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [20]

--------------------------------------------------------------------------------

The shift to new generation medications are continuing. It's just the market is now more competitive. New generation medications have become more competitive.

--------------------------------------------------------------------------------

Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [21]

--------------------------------------------------------------------------------

Okay, great. And then, I guess, can you speak to your advertising strategy? Any change there? And then also on the capital deployment -- from a capital deployment perspective, are you seeing anything in terms of -- or do you anticipate any sort of changes to your strategy at all? Do you see anything on the horizon from an M&A perspective?

--------------------------------------------------------------------------------

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [22]

--------------------------------------------------------------------------------

Advertising was fairly similar to last year. We have not made any changes other than spend more. As far as capital is concerned, we do look at acquisition opportunities doing normal course of business. If something pops up that makes sense, obviously, we'll do it. And that's why also we'd like to keep some cash on hand.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from David Westenberg from CL King.

--------------------------------------------------------------------------------

David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [24]

--------------------------------------------------------------------------------

So most of mine have already been asked here. But can you just maybe give us a little bit more color on the flea and tick season? Some of the manufacturers plus some of your -- some of the brick-and-mortar guys talked about flea and tick being having kind of a slow start to the season. Are you seeing it pick up? And if so, do you see any buying, maybe, lags or maybe buying opportunities for flea and tick products from consumers that maybe didn't get it in Q1 or most people's March quarter?

--------------------------------------------------------------------------------

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [25]

--------------------------------------------------------------------------------

We would agree that it was a slow start. It probably started picking up late last week of April. And May and June was pretty good so...

--------------------------------------------------------------------------------

David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [26]

--------------------------------------------------------------------------------

But I guess, there's no anticipated effects that, that slow start would have on maybe the subsequent quarters? Maybe like buy and pick-up or anything...

--------------------------------------------------------------------------------

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [27]

--------------------------------------------------------------------------------

Obviously, whatever we had -- our growth was single digit in the March quarter. That's -- the reason was because it was a slow start.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Thank you. At this time, no questions over the phone. Mr. Akdag, please proceed.

--------------------------------------------------------------------------------

Bruce S. Rosenbloom, PetMed Express, Inc. - CFO & Treasurer [29]

--------------------------------------------------------------------------------

Actually, could you go back? There was one more question from Anthony Lebiedzinski. If you could queue him in.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Our next question comes from Anthony Lebiedzinski from Sidoti & Company.

--------------------------------------------------------------------------------

Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [31]

--------------------------------------------------------------------------------

So I just wanted to follow up. So as far as a slow start for the flea and tick season, I assume this is because of the weather being somewhat unfavorable. Is that the case?

--------------------------------------------------------------------------------

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [32]

--------------------------------------------------------------------------------

That is correct, yes.

--------------------------------------------------------------------------------

Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [33]

--------------------------------------------------------------------------------

Right, right. Okay. So when I look at your new order sales trends, it did improve sequentially from the March quarter when you were down close to 6% in new order sales to up now close to 5%. Did you guys do anything differently as far as targeting new customers or just kind of more the same strategy?

--------------------------------------------------------------------------------

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [34]

--------------------------------------------------------------------------------

More of the same. And we have given additional discounts to stimulate sales.

--------------------------------------------------------------------------------

Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [35]

--------------------------------------------------------------------------------

Got it. And is this a strategy you still want to continue with?

--------------------------------------------------------------------------------

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [36]

--------------------------------------------------------------------------------

If the market conditions require it, yes.

--------------------------------------------------------------------------------

Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [37]

--------------------------------------------------------------------------------

Okay. So you can be nimble as far as how you adjust your pricing and your strategy, I assume, right?

--------------------------------------------------------------------------------

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [38]

--------------------------------------------------------------------------------

That is correct. Yes.

--------------------------------------------------------------------------------

Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [39]

--------------------------------------------------------------------------------

Right, right. Okay. And as far as the AOV increase from a year ago. This is another quarter that we saw a nice improvement there. Any -- can you just explain what's driving that and your expectation going forward?

--------------------------------------------------------------------------------

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [40]

--------------------------------------------------------------------------------

The shift to new generation medications continued in the June quarter.

--------------------------------------------------------------------------------

Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [41]

--------------------------------------------------------------------------------

Got it, okay. And as far as where we are in that -- as far as -- where do you think we are as far as the progression or adoption of these next-generation medications by the end consumers?

--------------------------------------------------------------------------------

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [42]

--------------------------------------------------------------------------------

It's continuing. It will probably continue for -- my guess would be for another year.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

As of now, we don't have any questions over the phone. Mr. Mendo Akdag, please proceed.

--------------------------------------------------------------------------------

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [44]

--------------------------------------------------------------------------------

Thank you. In fiscal 2019, we are focusing on continuing to increase sales and further improve our service level. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

Thank you so much, participants. That concludes today's conference call. Thank you all for joining. You may now disconnect.