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Edited Transcript of PETS earnings conference call or presentation 21-Oct-19 12:30pm GMT

Q2 2019 Petmed Express Inc Earnings Call

Pompano Beach Oct 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Petmed Express Inc earnings conference call or presentation Monday, October 21, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruce S. Rosenbloom

PetMed Express, Inc. - CFO & Treasurer

* Menderes Akdag

PetMed Express, Inc. - CEO, President & Director

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Conference Call Participants

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* Anthony Chester Lebiedzinski

Sidoti & Company, LLC - Senior Equity Research 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

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Presentation

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Operator [1]

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Welcome to the PetMed Express, Inc. doing business as 1-800-PetMeds conference call to review the financial results for the second fiscal quarter ended last September 30, 2019. 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 in the Internet and aimed 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. You may begin.

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

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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 on 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?

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

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Thank you, Bruce. Welcome, and thank you for joining us. Before we start the review of our financial results, we're pleased to report that we now have direct relationships with all the major manufacturers, and these manufacturers have minimum advertised price policy, allowing a general pricing discipline in the market.

Now we will compare our second fiscal quarter and 6 months ended on September 30, 2019, to last year's quarter and 6 months ended on September 30, 2018. For the second fiscal quarter ended on September 30, 2019, our sales were $69.9 million compared to $71.4 million for the same period the prior year, a decrease of 2%.

For the 6 months ended on September 30, 2019, sales were $149.9 million compared to $158.8 million for the 6 months of the prior year, a decrease of 5.6%. The decreases in sales were due to decreases in new order sales offset by increases in reorder sales for the quarter and decreases on both new and reorders sales for the 6 months.

Sales were negatively impacted by increased online competition and aggressive pricing in the market that forced us to reduce prices. As I just mentioned, the manufacturers' minimum advertised price policy should bring in general pricing discipline into the market. The average order value was approximately $85 for the quarter compared to $87 for the same period last year. The decrease was due to the price reductions.

For the second fiscal quarter, net income was $6.7 million or $0.33 diluted per share compared to $10.8 million or $0.52 diluted per share for the same quarter the prior year, a decrease to diluted earnings per share of 36%. And for the 6 months, net income was $12 million or $0.60 diluted per share compared to $23.3 million or $1.14 diluted per share a year ago, a decrease to diluted earnings per share of 48%.

In addition to decreases in sales, the decreases to net income were mainly attributable to lower gross profit margins due to price reductions. Operating margins sequentially improved by 430 basis points in the September quarter compared to the June quarter. Reorder sales increased by 1.4% to $61.9 million for the quarter compared to reorder sales of $61 million for the same quarter the prior year. For the 6 months, reorders sales decreased by 2.2% to $129.6 million compared to $132.5 million for the same period last year. New order sales decreased by 22% to $8.1 million for the quarter compared to $10.4 million for the same period the prior year. For the 6 months, the new order sales decreased by 23% to $20.3 million compared to $26.3 million for the same period last year.

We acquired approximately 98,000 new customers in our second fiscal quarter compared to 117,000 for the same period the prior year, and we acquired approximately 238,000 new customers in the 6 months compared to 286,000 for the same period a year ago. 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 season, with fall and winter being the off season.

For the second fiscal quarter, our gross profit as a percent of sales was 28.6% compared to 35.4% for the same period the prior year. And for the 6 months, our gross profit as a percent of sales was 27.9% compared to 34.8% for the same period a year ago. The percentage decreases can mainly be attributed to price reductions in response to increased online competition.

Gross margin sequentially improved higher than 30 basis points in the September quarter compared to the June quarter. As I mentioned in the beginning, we now have direct relationships with all the major manufacturers, which may help improve our gross margins in the future.

General and administrative expenses were up about $100,000 compared to the same quarter last year. For the quarter, we spent $4.8 million in advertising compared to $5.3 million for the same quarter the prior year, a decrease of 10%. The decrease was due to the elimination of television advertising in the quarter. For the 6 months, we spent $13.4 million in advertising compared to $12 million for the 6 months a year ago, an increase of 11%. The increase for the 6 months was related to the readdition of television advertising in the June quarter. The advertising cost of acquiring a customer was approximately of $49 for the quarter compared to $45 for the same quarter of the prior year. And for the 6 months, it was $56 compared to $42 for the 6 months last year. The increases were due to increases in advertising costs due to the more competitive environment.

We had $94.9 million in cash and cash equivalents and $90.1 million in inventory with no debt as of September 30, 2019. Net cash from operations for the 6 months was $70.3 million compared to $20.4 million for the same period last year.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Erin Wright of Crédit Suisse.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [2]

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I'm curious if you could speak to how the MAP pricing is being implemented and how that's playing out relative to your expectations. Is the pricing ticking up higher than expected? Obviously, the margin profile obviously says that to some extent. And then what percentage of your overall sales are under MAP pricing? And what percentage would you consider more flexible in terms of promotional activity?

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

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On MAP pricing, order average is higher than our prior pricing.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [4]

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And in what percent of your sales would you say are under those sort of MAP pricing strategies?

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

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Majority of them.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [6]

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Okay. Great. And then can you speak to the latest on sort of the advertising strategies for you and marketing campaign? I guess how should we be thinking about your advertising spend for the remainder of the year in light of this competitive landscape? And where do you stand now with the TV spot advertising strategy, particularly as we head into an election cycle? I'm just curious your thoughts there.

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

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Well, our budget is about 10% higher than what we spent in the prior year. We're working on optimizing our advertising, and we intend to be more efficient with our advertising spending. Television advertising spending will likely be -- it's going to be minimal for the next year.

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Operator [8]

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Our next question is from Kevin Ellich from Craig-Hallum.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [9]

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Mendo, so you said that you now have direct relationships with all the major manufacturers. Did the Zoetis contract, did that go into effect just this morning? Or when did that actually happen?

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Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [10]

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This month.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

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Excuse me?

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Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [12]

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This month in October.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [13]

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Got you. Great. Great. And then, I mean clearly, we saw nice improvement sequentially in the gross margin. Do you think we will continue to see a ramp sequentially with MAP? Or do you think -- I guess can you give us any help in terms of how gross profit should kind of go -- move forward -- improve from here?

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Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [14]

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We anticipate that it's going to improve from the September quarter. I think we'll have a better picture in the next 2 -- in the next couple quarters.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [15]

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Got you. Got you. Okay. Any update on potential white label -- white label deals, maybe with a big-box retailers like Target or Costco?

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Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [16]

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We do not have anything pending.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [17]

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Nothing pending. Are you in any discussions?

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

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No.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [19]

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Okay. And then inventory on the balance sheet, clearly down sequentially. Is this kind of the levels we should be thinking about given your direct purchasing from the manufacturers?

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

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Well, there is, of course, the advantaged buying opportunity. We will carry higher inventories, so it will depend.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [21]

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Okay, that makes sense. Bruce, really quickly. It looked like tax rate was a little bit higher than we're expecting. Nothing major, but it looks like it might have -- if it would've been 24%, like my modeling would have been $0.02. Just wondering what was the bump up on tax rate?

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Bruce S. Rosenbloom, PetMed Express, Inc. - CFO & Treasurer [22]

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Right. On tax rate, we -- every September quarter, we do have to reconcile our restricted stock compensation when they vest. And in the past, we've had what was called a windfall, which is actually a benefit for the last 2 or 3 years. Because of the change in stock price, we actually had a charge of $322,000 in the quarter. So again, every September quarter, these restricted shares reinvest in July. And going forward, that's when all our restricted stock will probably be vesting, and so we'll have this type of charge. It could be a charge or it could be a benefit depending on the change in the stock price from when the shares were issued versus when they vest.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [23]

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Got it. That makes a lot of sense. And then lastly, Mendo, competition. Can you talk a little bit more about the competitive landscape now that MAP is implemented? And then are you expecting any other major online retailers to jump into the pet prescription market?

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Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [24]

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Prices are, as we said, prices are stabilizing in the market with manufacturers enforcing MAP policies. And as far as -- we're not aware of anybody else, but that doesn't mean they are not planning on entering the market.

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Operator [25]

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

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [26]

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So first I was just wondering if you could perhaps comment on the progression of sales and gross margins during the quarter. Was it kind of steady? Or was there noticeable change between the months. And as far as the last manufacturer that is now going to be selling directly, just was wondering if you could perhaps comment on the percentage of sales that you get from that manufacturer.

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

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Yes. We're not going to comment on that and we're not going to get into month-to-month reporting.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [28]

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Okay. Great. Got it. That's fair. And then, as far as your advertising strategies, so is it safe to assume it's going to be digital only at this point?

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Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [29]

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Much more digital, yes. Majority is going to be digital.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [30]

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Right. Okay. So basically, the elimination of TV advertising was because it was not cost-efficient from your perspective. Is that safe to say?

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Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [31]

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That is correct. Yes.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [32]

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Got it. Okay. All right. And your outlook for just overall capital allocation priorities between buybacks and dividends. Anything there you'd like to comment on?

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Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [33]

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We don't have anything else at this time. We do get acquisition opportunities during normal course of business.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [34]

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Got it. Okay. And lastly, as far as your e-commerce website improvements that you are looking to do kind of like what's the timing on that? And what's -- what do you expect to get out of that? And what is the associated cost with that project?

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Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [35]

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It's about $5 million, the cost is. We anticipate to be on the platform before the end of the year. And the purpose of it is to improve user experience, especially that becomes critical. With prices stabilizing due to more personalization, ease-of-use, speed is the goal.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [36]

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Got it. Okay. And just to clarify, is that the end of the calendar year or end of the fiscal year?

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Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [37]

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End of the calendar year.

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Operator [38]

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Our next question is from Kevin Ellich from Craig-Hallum.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [39]

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Mendo, I have one follow-up, so -- and I don't think you talked about this. But you -- in the press release, you guys talked about the PetMeds rewards program. Just wondering, kind of what the genesis of that was. And I guess is this really just mean you guys are really focused on reorders sales? Or can you give us a little bit of detail behind that program?

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

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Objective is to increase customer retention, and it rewards the customers with higher purchases with additional discounts. Then there are also other benefits, such as Ask the Vet, free treats, free returns, educational articles, et cetera.

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Operator [41]

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At this time, there are no further questions. Mr. Akdag, you may proceed.

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

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Thank you. For the remainder of fiscal 2020, we will continue to be price competitive, and we're focused on optimizing our marketing in this more competitive environment and being more efficient with our advertising spending. In addition, we have been investing in our e-commerce platform to better service our customers. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call.

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Operator [43]

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Thank you for participating. You may disconnect.