U.S. Markets open in 6 hrs 39 mins

Edited Transcript of PETS earnings conference call or presentation 22-Oct-18 12:30pm GMT

Q2 2018 Petmed Express Inc Earnings Call

Pompano Beach Oct 23, 2018 (Thomson StreetEvents) -- Edited Transcript of Petmed Express Inc earnings conference call or presentation Monday, October 22, 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 - Senior Equity Research 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 Incorporated doing business as 1-800-PetMeds conference call to review the financial results for the second fiscal quarter ended September 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 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.

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

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 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?

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

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

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

Thank you, Bruce. Welcome, everyone. 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, 2018, to last year's quarter and 6 months ended on September 30, 2017.

For the second fiscal quarter ended on September 30, 2018, our sales were $71.4 million compared to $66.7 million for the same period the prior year, an increase of 7%.

For the 6 months ended on September 30, 2018, sales were $158.8 million compared to $146.4 million for the 6 months the prior year, an increase of 8.5%. The increases in sales were due to increases in reorder sales.

The average order value was approximately $87 for the quarter compared to $85 for the same period last year. For the second fiscal quarter, net income was $10.8 million or $0.52 diluted per share compared to $8.8 million or $0.43 diluted per share for the same quarter the prior year, an increase to net income of 23%. And for the 6 months, net income was $23.3 million or $1.14 diluted per share compared to $18 million or $0.88 diluted per share a year ago, an increase to net income of 29%.

In addition to increased sales, the tax reform act of 2017 helped boost our earnings. Reorder sales increased by 11% to $61 million for the quarter compared to reorder sales of $55.1 million for the same quarter the prior year.

For the 6 months, the reorder sales increased by 11% to $132.5 million compared to $119.5 million for the same period last year. New order sales decreased by 11% to $10.4 million for the quarter compared to $11.6 million for the same period the prior year. For the 6 months, the new orders sales decreased by 2% to $26.3 million compared to $26.8 million for the same period last year.

We acquired approximately 117,000 new customers in our second fiscal quarter compared to 134,000 for the same period the prior year. And we acquired approximately 286,000 new customers in the 6 months compared to 302,000 for the same period a year ago.

Approximately 85% of our sales were generated on our website for the quarter compared to 84% for the same period the prior year, which resulted in a 7.4% 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-season.

For the second fiscal quarter, our gross profit as a percent of sales was 35.4% compared to 35.2% for the same period the prior year. And for the 6 months, our gross profit as a percent of sales was the same 34.8% compared to the same period a year ago.

Our general and administrative expenses as a percent of sales was down to 8.7% compared to 9.3% for the same quarter last year. And for the 6 months, it was 8.3% compared to 8.5% for the 6 months the prior year. We were able to leverage the G&A with increased sales.

For the quarter, we spent $5.3 million in advertising compared to $4.5 million for the same quarter the prior year, an increase of 17%. For the 6 months, we spent $12 million in advertising compared to $10.8 million for the 6 months a year ago, an increase of 11%.

The advertising cost of acquiring a customer was approximately $45 for the quarter compared to $34 for the same quarter the prior year. And for the 6 months, it was $42 compared to $36 for the 6 months last year. The increases were due to increases in advertising costs due to the more competitive environment. The increased advertising positively impacted reorder sales.

We had $87.1 million in cash and cash equivalents and $28.6 million in inventory with no debt as of September 30, 2018. Net cash from operations for the 6 months was $20.4 million compared to $18.3 million for the same period last year.

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

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

Questions and Answers

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

Operator [1]

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

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

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

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

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

I have a couple of questions for you, guys, I guess. And Mendo, I wanted to start off with the new customer adds of 117,000 and your customer acquisition cost of $45, which is a little bit higher than you were looking for. Is cost per impression going up or are you just increasing the amount that you're spending online? Can you talk about the competitive landscape that you previously mentioned in your prepared remarks?

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

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

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

Yes. The cost of impression is going up double digits due to the more competitive environment.

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

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

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

Is that for key products or is it for kind of all products across the board?

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

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

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

I will say online.

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

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

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

Okay, online. Got you. Going up double digits. Okay. Do you think that will moderate going forward? Or do you think that's going to be the way it is for the foreseeable future?

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

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

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

It's difficult to tell. It's going to be depending on the competitiveness of the environment.

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

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

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

Okay. And then this is the first -- your first fiscal second quarter in the last couple of years where new customer sales were down on a year-over-year basis. Is that just due to the competitive landscape as well? Or, I guess, how should we think about that going forward?

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

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

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

Well, I mean, the cost was up, advertising cost, due to the more competitive environment.

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

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

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

Okay, great. And then switching to -- if Bruce can jump on this. G&A did come in lower than we expected, good cost management. How much more can you guys peel back in terms of costs and how low can that go, Bruce?

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

Bruce S. Rosenbloom, PetMed Express, Inc. - CFO & Treasurer [11]

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

Well, it's really as you would put, as Mendo mentioned, it's really dependent on sales. Obviously, if sales increases, that has an opportunity to further leverage our G&A expenses. We're going to continue to run the business as we've always run it. We obviously were very careful where we spend those dollars to make sure we're spending those dollars efficiently, but it's really more of a function of the sales.

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

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

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

Got it. And then Mendo, last question for me. Gross margin (inaudible) that did -- it was actually up on a year-over-year basis. Versus last quarter, we saw that little decline. Are you seeing any changes in terms of the costs of purchasing products or the cost of your sales?

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

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

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

Shift in sales due to higher margin items continued in the quarter offset by a more competitive marketplace.

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

Operator [14]

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

Next question comes from Erin Wright of Crédit Suisse.

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

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

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

On the gross margin, how should we think about the incremental benefit or traction you've historically seen from the next-generation parasiticide product? Are you still seeing an incremental benefit there?

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

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

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

Yes. We're seeing an incremental benefit offset by more aggressive pricing.

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

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

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

Okay. And how should we think about the quarterly progression for the advertising spend? Are there any changes in your strategy on the advertising front at all?

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

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

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

We're working on an off-line advertising plan. So we will probably invest some money on our brand off-line.

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

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

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

Okay, great. And then could you break down, I guess, roughly how much of your revenue today is prescription products versus other?

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

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

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

We're not going to disclose that due to competitive reasons.

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

Operator [21]

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

The next question comes from David Westenberg of CL King.

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

David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [22]

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

So you noted advertising impacting reorder sales. Can you remind us again why advertising impacts the reorder sales and maybe not so much why maybe it didn't impact new orders sales the way you'd like it?

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

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

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

Well, we have -- obviously, it's a reminder that if an existing customer sees our advertising, it's a reminder to reorder. So it helps from that perspective. It also may help activating inactive customers.

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

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

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

Okay. Could you say you might have got a lift for some -- maybe some inactive customers in that reorder sales? Or I don't know what you'd be prepared to give me in terms of qualitative or quantitative data on increasing inactives?

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

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

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

We're going to work on that going forward, actually. We always do, but we'll be more aggressive as far as activating inactive customers going forward.

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

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

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

We have seen an increase in buying outside the traditional veterinary channel. Being that, that's happening, do you think that there is maybe an impact for you guys to purchase maybe directly from more manufacturers on a go-forward basis? Or is there any opportunity to maybe lower your input costs?

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

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

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

It's a possibility, yes.

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

David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [28]

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

Great. And then obviously, the next-generation flea and tick has really helped on the gross margin front. Anticipating in 2000 -- maybe late 2019, maybe 2020, we're going to probably see another flea, tick and heartworm kind of triple that should hit the market, granted time lines can be finicky. However, what would you anticipate the impact in terms of either gross margin or sales or any sort of way to think about how that might benefit the business?

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

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

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

It should have a positive impact. Having said that, new-generation medications have become also more competitive price wise.

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

Operator [30]

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

The next question comes from Anthony Lebiedzinski of Fidelity & Company.

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

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

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

I'm actually at Sidoti, not Fidelity just to clarify. So as far as the advertising strategy, Mendo, can you talk about some off-line ads? I believe you guys did some limited spots on TV during the quarter. Just wanted to see if you could expand on that. And does that strategy of being off-line also include some direct mail pieces or anything else that we should think about?

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

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

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

We did a test during the quarter and we will probably continue that going forward. Yes, it will be broadcast and direct mail print.

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

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

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

Got it. Okay. And also in terms of just the AOV increasing again, is it just a continuation of the same shift towards the higher price, higher margin products?

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

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

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

Yes. That is correct.

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

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

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

Got it, got it. Okay. All right. And given your tremendous cash flow generation, what are your thoughts on doing a meaningful share buyback?

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

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

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

That's up to the board. It's on the agenda. So we'll see what happens.

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

Operator [37]

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

(Operator Instructions) The next question comes from Kevin Ellich of Craig-Hallum.

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

Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [38]

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

Just had a couple of follow-ups. Going back to your inventories, it looks like they've been building, Mendo. Are you stockpiling as you see better pricing out there in the marketplace now? And then as it relates to your cash flow, it looks like operating cash this quarter was actually down year-over-year. And I don't know if Bruce can talk about some of the moving parts there and what's going to reverse next quarter?

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

Menderes Akdag, PetMed Express, Inc. - CEO, President & Director [39]

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

The increase in inventory is due to better pricing, yes.

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

Bruce S. Rosenbloom, PetMed Express, Inc. - CFO & Treasurer [40]

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

As far as cash from operations, obviously, we had a strong net income. The other fluctuations were timing more so with inventory and payables. As Mendo noted, we stocked up on inventory a little bit more during this quarter due to pricing opportunities. So it's more of a function of that than anything else.

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

Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [41]

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

Got it. And then, Mendo, I know this is probably going to be asked in different ways this call, but with the competitive landscape, should we see more promotional activity and discounting going forward? I think earlier this month, you guys were running a promotion for existing customers that was little bit maybe twice as much as you normally run. Just curious where that stands.

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

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

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

Yes. You will see more promotions based on the competitiveness of the market.

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

Operator [43]

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

And now I'll turn the call over back to Mr. Mendo Akdag.

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

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

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

Thank you. For the remainder of fiscal 2019, we will continue to focus on increasing sales and further improving our service levels. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call.

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

Operator [45]

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

Thank you for participating. You may now disconnect.