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Edited Transcript of PETS earnings conference call or presentation 6-May-19 12:30pm GMT

Q4 2018 Petmed Express Inc Earnings Call

Pompano Beach May 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Petmed Express Inc earnings conference call or presentation Monday, May 6, 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

* David Michael Westenberg

Guggenheim Securities, LLC, Research Division - 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 fourth fiscal quarter and fiscal year ended March 31, 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 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. 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 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 on 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?

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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. Today, we will review the highlights of our financial results. We'll compare our fourth fiscal quarter and fiscal year ended on March 31, 2019, to last year's quarter and fiscal year ended on March 31, 2018.

For the fourth fiscal quarter ended on March 31, 2019, our sales were $64.6 million compared to sales of $67.3 million for the same period the prior year, a decrease of 4.1%. For the fiscal year ended on March 31, 2019, sales were $283.4 million compared to $273.8 million for the prior fiscal year, an increase of 3.5%. The decrease in sales for the quarter was due to decreases in reorder and new order sales. And the increase in sales for the fiscal year was due to increases in reorder sale. Increased online competition negatively impacted the sales for the quarter. The average order value was approximately $85 for the quarter compared to $89 for the same quarter the prior year. The decrease was due to lower pricing.

For the fourth fiscal quarter, net income was $6.6 million or $0.32 diluted per share compared to $10.2 million or $0.50 diluted per share for the same quarter the prior year, a decrease to net income of 35%. For the fiscal year, net income was $37.7 million or $1.84 diluted per share compared to $37.3 million or $1.82 diluted per share a year ago, an increase to net income of 1.2%. In addition to decreases in sale, the decrease to net income for the quarter was mainly due to lower gross profit margins and higher advertising expenses.

Reorder sales decreased by 1.9% to $55.9 million for the quarter compared to reorder sales of $57 million for the same quarter the prior year. For the fiscal year, reorder sales increased by 6.3% to $241.8 million compared to $227.5 million for the prior year.

New order sales decreased by 15% to $8.7 million for the quarter compared to $10.3 million for the same period the prior year. For the fiscal year, new order sales decreased by 10% to $41.6 million compared to $46.3 million for the prior year.

We acquired approximately 101,000 new customers in our fourth fiscal quarter compared to 113,000 for the same period the prior year, and we acquired approximately 467,000 new customers in the fiscal year compared to 521,000 for the prior year.

For the quarter, approximately 85% of our sales were generated on our website, which was the same as the prior year. 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 fourth fiscal quarter, our gross profit as a percent of sales was 32.1% compared to 37% for the same period a year ago. For the fiscal year, our gross profit as a percent of sales was 33.6% compared to 35.7% for the prior year. The percentage decreases for the quarter and the fiscal year can mainly be attributed to additional discounts given to customers in response to increased online competition.

Our general and administrative expenses as a percent of sales was flat at 9% for the quarter compared to the same quarter the prior year. And for the fiscal year, it was at 8.7% compared to 8.9% for the prior year.

For the quarter, we spent about $6.5 million in advertising compared to $4.3 million for the same quarter the prior year. For the fiscal year, our spending was $22.1 million for advertising compared to $19.3 million for the prior fiscal year.

We restarted television advertising during the quarter to increase brand awareness. Advertising cost of acquiring a customer for the quarter, defined as total advertising expenses divided by total new customers acquired, was approximately $65 compared to $38 for the same quarter the prior year. And for the fiscal year, it was $47 compared to $37 for the prior fiscal year. The increases are mainly due to increases in online advertising costs and the re-addition of television advertising to increase brand awareness.

We had $100.5 million in cash and cash equivalents and $21.4 million in inventory with no debt as of March 31, 2019.

Net cash from operations for the fiscal year was $45.1 million compared to $37.4 million for the prior fiscal year. The majority of the increase was due to decreases in inventory compared to the increases in inventory for the prior fiscal year.

Capital expenditures were approximately $600,000 for the fiscal 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 comes from Kevin Ellich of Craig-Hallum.

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

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I guess let's start off with the increased advertising spend, $6.5 million this quarter. Wondering if that's a good run rate to think about as we update our models for fiscal '20. And then also with the ad campaign, when did you guys start that? Was that for the entire quarter? Or was that started kind of in February?

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

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The late February was when the television advertising started.

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

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Okay. And thoughts on ad spend for fiscal '20?

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

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Yes, probably it's going to be double-digit increase, that's what we anticipate. We are working on optimizing it at this time. So we'll see where it ends up.

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

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Okay. Got you. And then in the press release you also talked about making some investments to your e-commerce platform to improve customer service. Just wondering what areas specifically? And how much are those investments going to be or what are you planning?

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

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The investment is going to be about $5 million approximately. The focus is usability of the website, speed, up-selling, cross-selling capabilities, hyper-personalization capabilities.

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

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Okay. That's helpful. And then, Bruce noticed inventories on the balance sheet declined about $11 million sequentially. Just wondering, is that just due to your outlook for the year or timing due to the pricing? Any thoughts?

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Bruce S. Rosenbloom, PetMed Express, Inc. - CFO & Treasurer [9]

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It's the latter. It's just timing of promotional buys. There wasn't a major incentive to buy during the fourth quarter. So we just ran our inventories at our normal levels.

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

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Okay. And then last one for me is, we all know there is a lot of competition in the marketplace and whatnot, a lot of pricing pressure. But just wondering with all that cash you have on the balance sheet, what bullets do you have left to fire to fend off competition or drive growth or stabilize margins?

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

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We will be price-competitive and increase advertising to promote brand awareness.

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Operator [12]

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Our next question comes from Erin Wright of Crédit Suisse.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [13]

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Great. Another question on the competitive landscape here. I'm just curious where most of it's stemming from. Is it mostly from the chewy.coms of the world and Petco and with express scripts? Or is it more from the -- that associated kind of online offerings such as the Vets First Choice of the world? I'm just curious if it's newer concepts that are making inroads. Or -- and where you can kind of, I guess, better position yourselves in terms of those competitive dynamics?

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

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It's coming from online direct-to-consumer models.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [15]

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Okay. All right. And then thinking about, sort of, going into next year, we could see some meaningful changes in the pet parasiticide landscape with the potential launch of new flea, tick and heartworm triple combination products. I guess how we -- should we think about the opportunities for you and -- as well as some of the risk factors too, given your inherent exposure to parasiticides? I guess do you think you'll be able to get great access to these products? Or how can you better position yourselves in light of some of the new development and innovation across the industry?

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

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It will be positive for us. Any new medication that comes to the market is going to be -- should be a positive for us.

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Operator [17]

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

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [18]

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So just wondering as far as the mix of prescription over-the-counter, I know you guys don't give out those numbers, but just wondering if there was any notable change in the quarter for this quarter versus a year ago.

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Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [19]

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The majority of the business is prescription, and I will leave it at that.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [20]

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Got it. Okay. So as far as the gross margin, roughly 32%, is that a good run rate that we should expect going forward?

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Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [21]

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We anticipate continuing pressure on gross margins, and it's going to depend on the competitiveness of the market. We'll see where it ends up.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [22]

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Got it. Right. And as far as the advertising strategies, you mentioned double-digit increase that you anticipate in fiscal '20, are you looking at a similar type of spending online versus TV versus print? Or are you looking to make any changes to that?

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Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [23]

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There's a significant gross increase online due to the more competitive market. So we're -- as we said, we started television advertising during the quarter to increase brand awareness. We're currently working on optimizing it. And our budget is flexible depending on ROI. So we'll see where it -- how it shapes up.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [24]

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Got it. Okay. So meaning, you can pull back if you're not seeing the returns that you anticipate?

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

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That's a possibility.

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

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Right. Right. Okay. And as far as the $5 million cost, is that primarily CapEx? Or will some of that flow through the income statement?

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

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I believe it's CapEx, yes, primarily CapEx.

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Operator [28]

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A follow-up question comes from Kevin Ellich of Craig-Hallum.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [29]

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Mendo, one thing that kind of jumped out to us too was reorder sales down 1.8% this quarter, or 1.9% I think you said. We haven't seen that happen in a long time even with the increased competition. What are you seeing in the competitive market? Anything different? And I guess even though it's still kind of early May, wondering if you saw any bounce in April.

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Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [30]

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Lower pricing negatively impacted reorder sales, also the colder weather might have also had a negative impact. Competitive pressures, though, is -- also had an impact. So we'll see what happens.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [31]

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Okay. Do you think that's going to bounce here with flea and tick season?

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

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We hope so.

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Operator [33]

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We have another question on queue coming from Anthony Lebiedzinski of Sidoti.

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

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Yes, so as far as just the reorder sales comment, just wondering, so was it all pricing? So if -- just wondering as far as the number of orders from reorders -- reorder customers, was that kind of flat or up and that was all negatively impacted by pricing. Just wanted to get a better clarification on that.

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

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Yes. Orders were up about 0.5%. So the rest of the decline in sales is due to lower pricing.

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Operator [36]

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A question next on queue coming from David Westenberg of Guggenheim Securities.

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David Michael Westenberg, Guggenheim Securities, LLC, Research Division - Research Analyst [37]

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So just kind of a question on -- follow-up to Erin's question. Are you actually seeing any maybe differences in success in getting the authorization from veterinary clinics? I know the -- sort of the alternative models coming in with online pharmacies with vets, some of the vets are adopting maybe a strategy of trying to refuse the authorization. So is that actually happening? Or -- and maybe if that had any kind of effect?

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

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I don't think that's having an impact. Actually, there's a slight improvement this year compared to last year.

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David Michael Westenberg, Guggenheim Securities, LLC, Research Division - Research Analyst [39]

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So the conversion is actually improving? Do you think actually maybe that is maybe a build-on effect because there are now the Chewys and Allivets of the world?

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

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It's possible.

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Operator [41]

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(Operator Instructions) At this time, we have no questions on queue. Back to you, Bruce.

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

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Thank you. In fiscal 2020, we will continue to be price competitive and increase advertising to promote brand awareness. In addition, we'll be 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. That concludes today's conference. Thank you for participating. You may now disconnect.