PetMed Express, Inc. (NASDAQ:PETS) Q3 2022 Earnings Call Transcript
PetMed Express, Inc. (NASDAQ:PETS) Q3 2022 Earnings Call Transcript February 6, 2023
Operator: Good afternoon, everyone, and thank you for joining the PetMed Express Third Quarter Earnings Conference Call. My name is Doug, the operator for today's call. I would now like to pass the conference over to our host, Mr. Brian Prenoveau, Investor Relations. Sir, the floor is yours now.
Brian Prenoveau: Thank you, operator, and I'd like to welcome everybody here today to the PetMed Express fiscal third quarter earnings call. I'd also 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 during this call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act 1934, as amended, 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 results could differ materially from those projected. There can be no assurance that any forward-looking results will occur or be realized, and nothing contained in this presentation is or should be relied upon as a representation or warranty as to any future matter, including any matter in respect to the operations or business or financial condition of PetMed. PetMed undertakes no obligation to update publicly these forward-looking statements based on subsequent events except as may be required by applicable law, regulation or other competent legal authority. 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. Also, during the course of today's call, the company will be discussing one or more non-GAAP financial measures.
Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release we issued this afternoon. Now let me introduce our CEO and President, Matt Hulett. Matt?
Matthew Hulett: Thank you, Brian. Thank you for making the time today to participate in our earnings call. For anyone new to the PetMed Express company and story, PetMed is a company that delivers prescription and non-prescription medications, food, supplements, supplies and vet services direct to the consumer. Our expert online pharmacy is an established and trusted brand, as evidenced by the fact that we have served over 11 million pet parent customers over our company's 26 year operating history. PetMed is a leading pet retailer for both prescription and non-prescription medication. We have a loyal customer base of pet parents that value our brand, service and quality. However, we believe our company and this industry can be more to the millions of pet parents across the country, and our goal is to be the market leader in pet wellness and health care or as we like to say, be the trusted pet health experts.
Because we believe every pet deserves to live a long, happy and healthy life, we will be walking through the following components in today's earnings call: one, an update on our strategic road map, including our recent agreement to acquire PetCareRx; two, a detailed review of our full year Q3 earnings; and three, an overview of our go-forward thoughts related to our capital allocation strategy. From management's perspective, we are pleased with our results this quarter as well as the progress we have made on the company transformation. Next slide, please. Over this last year, PetMed has been in a rebuilding mode with a new and experienced management team and updated strategy and a revised overall approach to the market as we transition to a growth-oriented business.
I will provide an overview of our third quarter results and then our CFO, Christine Chambers, will go into greater depth later in the presentation on our financial performance. Third quarter sales were $58.9 million compared to sales of $60.7 million for the same period of the prior year. While this equates to a decrease in sales of 3% year-over-year compared to a double-digit decline in fiscal year 2022. One of the reasons that we are pleased with the quarter was that we saw an increase in net new customers of 9% year-over-year. This is an important milestone for the company. since we have not seen an increase in net new customers since Q1 of 2021. Most importantly, we achieved this while staying disciplined in terms of our customer acquisition efficiency metrics.
Our new customer count for the quarter was approximately 72,000 compared to 66,000 in the prior year, and our LTV to CAC for the quarter was 1.6. Our average order value was $88, relatively flat to last year and last quarter. We also saw continued growth in the recurring revenue side of our business. Our AutoShip and Save program continues to grow and expand, and approximately 42% of our revenue was recurring revenue derived from our AutoShip subscription program during the second quarter. This part of our business increased 8% on a sequential basis and doubled year-over-year. AutoShip continues to be an important strategic lever for PetMed, especially considering that the focus of PetMed's business has historically been solely focused on the prescription refills business.
Later in this presentation, we will walk through in detail our product catalog expansion strategy, especially as it relates to our agreement to acquire PetCareRx. We believe that there are clear expansion opportunities for more customer engagement in the non-medication space, which will increase our pet parent wallet share, generate more recurring revenues and lead to an increase in customer lifetime value. Simply put, with a broader catalog assortment, we see an opportunity to attract new customers while selling more to our existing customers. We have previously discussed what the company's strategy has been historically and what it will be going forward. PetMed is shifting from being simply a leading pet medication retailer to being the pet health experts, a market leader in pet health care expertise.
We want to be every pet parent's go-to destination for holistic health and wellness from nose to tail and be that go-to destination over a pet's entire life cycle. On that journey to becoming trusted pet health experts, we believe the strong relationships we've established with pet parents through pet medication prescriptions is an entry way to providing them with further goods and services, including prescription food, TeleVet services, supplements and soon, pet insurance. The four points of our top plan are medication, care, nutrition and wellness. We view these points as being key to building a differentiated brand and experienced to pet parents everywhere. We recognize the shifts that are occurring in the regulatory landscape, which led us to our first big investment, pet telemedicine.
Our investment in and partnership with Vetster enabled PetMed to become what we believe to be the first pet retailer to offer pet telemedicine at scale. That live, our new co-branded offering with Vetster, connects pet parents to thousands of licensed veterinarians, providing quality online vet services through video chat appointments 24/7 and is exclusive to the PetMed platform. We see the virtualization of vet services as being a key pillar of the pets business and a differentiator in the pet space. So vet live is a strategic advantage that will continue to develop as regulation changes and as consumer education and awareness develops. The pending acquisition of PetCareRx represents a significant opportunity to expand our PetMed's catalog with a broader set of consumable products and nutrition.
PetcareRx's catalog offerings include over 13,000 of the best non-medication health and wellness products, including food, supplements and other similar products. They also bring us an incremental distribution center capability outside of our core medication distribution. We have been rapidly filling in the strategic pieces of our strategy to take advantage of a growing industry, which is the topic of our next slide. As we have covered in our previous earnings calls, PetMed operates in a growing addressable market. Because of our pending acquisition, partnerships and core improvements in the PetMed business, PetMed is now able to actively participate in a broader addressable market across the pet wellness space. With our investments in vet care and a broader product selection, we are in an enviable position to gain market share and expand our relationship with our customers.
Over time, we expect our revenues to be more diversified as we address a broader range of pet parents' needs. Management is excited about how we have positioned PetMed's to be a growth company. The pet space has proven to be a resilient vertical even in recessionary times. Pet parents see their pets as an extension of their own families and increasingly demand premium pet care options. There are some reasons why management is excited about PetMed's growth opportunities from a macro perspective. One, pet parents are less likely to reduce their pet purchasing budget, especially in the consumable and medication categories. Two, U.S. household pet ownership has increased over time, and today, 70% of U.S. households now own a pet. Those pet parents will need and seek health and wellness care provided by a trusted brand.
Three, consumers also now expect everything to be real time, fast and digital, a trend impacting every industry. The e-commerce channel continues to expand rapidly. We expect the pet vertical to follow this expansion, just like we have seen in other digital e-commerce verticals. Today, our addressable market is largely dominated by offline sales, but we see the growing trend to purchase online as an opportunity, which would be very favorable for us. Four, we also see a real trend towards the digitization of pet health care just like we have in human health. Pet parents are thinking through the entire spectrum of their pet care from diet to veterinary services, from infancy through old age, and they're examining the channels through which they access those products and services.
We believe PetMed is uniquely positioned to take advantage of these trends. By focusing on total wellness, we can offer products and services to pet parents that are diet and health focus in the areas of pet medication, premium prescription and non-prescription food, supplements and TeleVet services. Before we dive into the quarterly financial results, I want to remind our stakeholders of several important achievements that signaled the beginning of the transformation of PetMed into a growth business. Net new customer growth. Year-over-year customer growth shows the vitality of any growing business, and we shared good news on this front on today's earnings call. As we expand our product catalog over the longer term, we anticipate that PetMed Express will benefit from having a higher LTV and more operating leverage to acquire customers at scale.
More subscription revenue. We have seen substantial progress here, and we'll continue to see more recurring business that enables PetMed's to be a more predictable business model with higher LTV and increased loyalty. Sell more non-medication products. The expansion of our product catalog and services has been a key initiative for us. We decided to turbocharge this effort through the pending acquisition of PetCareRx. PetMed's will benefit by having more recurring sales, increased regular visits, thus delivering a higher LTV. Our customers desire a wider selection from us, and we look forward to working with the PetCareRx team once we close the transaction to work towards these expansion opportunities. Unique and differentiated services via digital-based health care services.
Our goal is to continue to move more health and wellness services online with our long-term perspective that this will be driven by pet medications and veterinary care. Our next slide summarizes how these products and services are tied together. PetMed is uniquely positioned at the starting point with a highly regulated and complex pharmaceutical segment of the pet industry. Last month, we announced the agreement to acquire PetCareRx, a leading supplier of pet medications, premium food and supplies. The combination of the two long operating companies will greatly impact the longevity and happiness of pets on a larger scale. PetCareRx has been operating as a privately owned pet health and wellness company for over 20 years. The acquisition is intended to provide the following advantages: a greatly expanded addressable market beyond our current pet medication market, immediate revenue and customer growth, and greater non-medication sales for the core PetMed business.
We are confident that we will see similar expansion of buying behavior with our PetMed customers and will rapidly move the supplier relationships and products from the PetCareRx portfolio over to PetMeds over the next several quarters. Once the transaction closes, PetMed's will be working towards integrating the PetCareRx brands and catalog under the PetMeds e-commerce platform. Longer term, the win for pet parents and our stakeholders is that PetMeds will now be able to service a wider range of products and services for what we like to refer to as from nose to tail. Offering an expanded catalog to our recurring customers is a great place to start, but that alone doesn't create an adequate moat around the PetMed's business. As a result of consumer demand, we believe strongly that pet health services will become more digitally enabled, a trend that we have already seen in human health.
Photo by Ayla Verschueren on Unsplash
We are very excited about our strategic relationship and minority ownership stake, investor, our exclusive partner that accelerated our entry into the virtual telehealth and telemedicine space. We also believe pet telemedicine is going to be a huge trend over time, not unlike what we have seen with other services like online and mobile food and delivery services. There are a slew of innovations that you can expect to see from PetMed, as we integrate the technology from our various partnerships in unique, differentiated and bespoke ways. And all of these efforts are designed to provide high efficacy outcomes for pets to live healthier and happier lives. Expect to see more innovations and product catalog extensions over the coming quarters that will deepen the benefit of our strategic pillars.
I would like to now turn the call over to Christine to walk you through our Q3 financial performance and the company fundamentals. Christine?
Christine Chambers: Thank you, Matt. PetMed has a strong set of core assets and capabilities that we plan on leveraging to spur growth in the PetMed's business. PetMed maintains a strong balance sheet of over $102 million of unrestricted cash as at December 31, 2022. Our brand is widely known and trusted. Our market research indicates that 55% of U.S. pet parents are aware of the PetMeds brand. Having a strong brand takes years to develop, and our customers tell us, they look at PetMed as their trusted pharmacy and pet medication expert. We have one of the largest direct-to-consumer vet networks in the online retail space with over 70,000 veterinarians that we've worked with over the company's history. Because of our industry-leading service relationships with vet, our prescription medication authorization rates are the highest they've ever been, which speaks volumes to the level of veterinary cooperation that we receive on a daily basis.
Our customers love our brand and our service. Our NPS score is over 80, which puts us in the upper quartile alongside some of the most beloved brands in the world. We provide a 100% satisfaction guarantee to our customers, and we go the extra mile with genuine, empathic and expert service. As Matt previously mentioned, our order ship program continues to grow and expand. Approximately 42% of our revenue was recurring revenue derived from our AutoShip subscription program during the third quarter. This is an 8% increase on a sequential basis. I also want to say that I'm really excited with the speed at which we've begun to see business improvements. Investment in G&A has provided greater transparency, smarter decision making and better analytics.
Let me turn to our financial results for the quarter ending December 31, 2022, our third fiscal quarter 2023. My remarks will compare this year's quarterly results to the same quarter last year. Third quarter revenue was $58.9 million compared to revenue of $60.7 million in the same period last year. While this is a decrease of 3%, there's an important milestone to highlight, net new customer growth. We welcomed approximately 72,000 new pet parents this quarter compared to 61,000 in the prior quarter and 66,000 in the prior year. This represents growth of over 9% year-over-year and an increase of 18% sequentially. We have actively targeted acquisition of lapsed customers through competitive promotions in the quarter to drive new customer acquisition.
Repeat sales of $53 million for the quarter decreased 4% compared to repeat sales of $55 million in the same period last year. Gross profit as a percentage of sales was 25.9% compared to 29.2% in the same quarter last year and 28.2% in the prior quarter. The decline in gross profit was primarily due to higher seasonal promotions during the quarter as consistent throughout the industry. Our promotional activity, however, was specifically focused on reactivating our large base of lapsed customers. With a more modern marketing stack and refreshed marketing team, we will lean into optimizing this customer base and fully expect to cross-sell additional catalog to these customers in the future. While we're always evaluating our promotional strategies, we don't expect to repeat the deep promotions that we offered this past quarter to reengage the specific customer set.
G&A increased $2.9 million year-over-year, but when normalized for non-operating costs relating to the pending PetCareRx transaction, G&A increased $2.3 million year-over-year. This is due to an increase of $1.4 million related to payroll expenses, which includes $400,000 related to stock compensation. $500,000 related to the third-party resources and some increases in software expenses and other G&A. With the exclusion of no-operating items, we do not expect G&A to continue to increase at the same rate next fiscal year. We believe the right team is largely in place now and the G&A will be fairly flat exiting fiscal year 2023 and going forward. Please note that as we push to close the acquisition in the fourth quarter, we will expect to see additional acquisition-related expenses.
We received and accrued for a sales tax assessment in the second quarter of fiscal year 2023. Based on the assessment received, the company initiated a process to evaluate the potential for further sales tax contingency. The result of this evaluation could have a material impact on the company's financial statements. We expect to complete the review in the quarter ending March 31, 2023, and we will provide a further update after we complete our full analysis. Net income was breakeven for the third quarter and $0.00 per diluted share and includes $500,000 or $0.02 per diluted share for items not indicative of our ongoing operations. This is compared to $4.3 million or $0.21 per diluted share for the same quarter last year. Adjusted EBITDA for the quarter was $2.7 million compared to $7.6 million in the same quarter last year.
The year-over-year decline reflects a decline in gross margin and targeted increases in G&A. As we look forward, we'll be primarily focused on closing and integrating the pending acquisition and driving returns on the recent investments. Management believes that the organic and inorganic investments that we've made over the last year in the business are sufficient to drive long-term sustainable growth going forward. Therefore, being focused on operating execution and integration is paramount in order to realize those future returns. Now I'd like to talk about the pending PetCareRx acquisition. We've covered some of this material in our Analyst Day in January, but we'd like to reiterate the structure and strategic rationale for the transaction.
Total consideration of $36 million, trailing 12-month revenue of $42 million, 200,000 customers, more than 10,000 brands and product SKUs, around 80 employees and are headquarters in distribution center located in Long Island, New York and gross margins approximately the same as PetMeds. As mentioned, we expect the deal to close this quarter. While the PetCareRx brand will continue to operate independently as part of the PetMed's wellness and consumables business, it's expected to immediately deliver top line revenue growth. Over time, we expect it to be bottom line accretive as we leverage synergies and streamline infrastructure. Now I'd like to discuss our capital allocation. As we transform the PetMed's business, the acquisition of PetCareRx is the first catalyst that provides immediate growth as well as the ability to spend more in variable marketing as we work to sell more products to our customer base.
Over the long run, management remains committed to driving total shareholder return. As such, for the third quarter, we will pay a dividend at the same rates as we have in prior quarters at $0.30 per share. Consistent with prior practice, the Board will evaluate the declaration of dividends on a quarterly basis as part of our normal quarterly business cycle. In addition, management strongly believes that investors will see a higher return over the long term through stock appreciation with a growing company in a growing market. And with that, I'll turn the call back to Matt.
Matthew Hulett: Thanks, Christine. Again, management is very encouraged by the performance of the business this quarter as well as the impressive acceleration in the long-term business drivers. We announced today that PetMed is poised for growth. As we have stated over the last several quarters, PetMed is pursuing a vertical specialty retailer strategy. We aim to be pet parents trusted pet health experts. We have been sharing our strategy with you for a little over a year, and we have substantially filled in the pieces to build an enduring, profitable and growing pet health company. To be crystal clear on the measures for success, net new customer growth, more subscription revenue. We have seen rapid progress here, and we'll continue to see more recurring business that enables PetMeds to be a more predictable business model.
Sell more nonmedication products via product catalog expansion. Unique and differentiated services via digital-based health care services and veterinary care. We will continue to add more virtual care and wellness services that will contribute to greater loyalty or less customer churn and uniqueness in the market. With over 2 million unique customers, we are a well-known and trusted brand, and we operate in a market that is resilient to economic headwinds. We have a strong balance sheet that provides us with the financial flexibility to take advantage of a large and growing market. We are excited to welcome our new pet members, PetCareRx. PetMed's job is certainly not done. We will be working hard to integrate, execute and go-to-market with these new assets and initiatives.
This ends our prepared remarks. Operator, we are now ready to take questions.
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