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PetMed Express Inc (PETS) Q1 2019 Earnings Call Transcript

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PetMed Express Inc (NASDAQ: PETS)
Q1 2019 Earnings Call
Jul 22, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the PetMed Express, Inc. doing business as 1-800-PetMeds Conference Call to Review the Financial Results for the First Fiscal Quarter Ended June 30th 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 medication 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.

Bruce S. Rosenbloom -- Chief Financial Officer

Thank you. Good morning. I would 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 in our most recent Annual Report and other filings with the Securities and Exchange Commission.

Now, let me introduce today's speaker, Mendo Akdag, the President and Chief Executive Officer of 1-800-PetMeds. Mendo?

Menderes Akdag -- Chief Executive Officer, President and Director

Thank you, Bruce. Welcome, everyone, and thank you for joining us. Today, we will review the highlights of our financial results. We'll compare our first fiscal quarter ended on June 30, 2019, to last year's quarter, ended on June 30, 2018.

For the first fiscal quarter ended on June 30, 2019, sales were $80 million compared to sales of $87.4 million for the same period the prior year, a decline of 5%. The decrease in sales was due to decreases in new order and reorder sales. Sales were negatively impacted by increased online competition and aggressive pricing in the market that forced us to reduce prices. Our average order value was approximately $86 for the quarter, compared to $90 for the same quarter last year. The decrease was due to the price reductions.

For the first fiscal quarter, net income was $5.3 million, or $0.26 diluted per share, compared to $12.6 million or $0.62 diluted per share for the same quarter last year, a decreased diluted earnings per share of 57%. In addition to decreases in sales, the decreased net income for the quarter was mainly attributable to lower gross profit margins due to price reductions and higher advertising expenses.

New orders sales decreased by 23% to $12.2 million for the quarter compared to $15.9 million for the same quarter of the prior year. Reorder sales decreased by 5% to $67.7 million for the quarter compared to reorder sales of $71.5 million for the same quarter last year. We acquired approximately 140,000 net customers in our first fiscal quarter, compared to 169,000 for the same period the prior year. Approximately 84% of our sales were generated on our website for the quarter compared to 85% for the same period last 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 first fiscal quarter, our gross profit as a percent of sales was 27.3% compared to 34.3% for the same period a year ago. The percentage decrease can mainly be attributed to price reductions in response to increased online competition. We made further progress on having direct relationships with the major manufacturers in the current quarter, which may help improve our gross margins in the future.

Our general and administrative expenses were down approximately $400,000 for the quarter compared to the same period last year. We spent $8.6 million in advertising for the quarter compared to $6.7 million for the same quarter the prior year, an increase of about 29%. The increase was due to the readdition of television advertising. Advertising cost of acquiring a customer for the quarter, defined as total advertising expenses divided by total new customers acquired, was approximately $62 compared to $40 for the same quarter a year ago. The increase was due to the readdition of television advertising.

We had $83.4 million in cash and cash equivalents and $30.2 million in inventory, with no debt as of June 30, 2019. Cash from operations for the quarter was negatively impacted by an $8.8 million increase in inventory, the result of cost advantaged inventory buys we made during the quarter. We intend to return to normal inventory levels in future quarters.

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

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Kevin Ellich from Craig-Hallum. Please proceed.

Kevin Kim Ellich -- Craig-Hallum Capital Group -- Analyst

Good morning. Thanks for taking my questions. Mendo, gross margin down almost 700 basis points year-over-year, little bit lower than what we were expecting. Wondering, where do you think that could bottom out or do you think this is the bottom with some of your initiatives you're putting in place and the changing on the marketing front?

Menderes Akdag -- Chief Executive Officer, President and Director

We think this may be the bottom out. We'd expect the pricing to stabilize in the market going forward and the reason for that is, the manufacturers are opening up and they have minimum advertised price policies which should allow a general pricing discipline in the market.

Kevin Kim Ellich -- Craig-Hallum Capital Group -- Analyst

Got it. And then, we noticed toward the end of Q1, you introduced some volume based discounts. By our math, it looks like it's a 5% to 10%. How much impact do these discounts have on gross margins if they remain in place?

Menderes Akdag -- Chief Executive Officer, President and Director

Again, we anticipate that the gross margins should improve in the future quarters and you will get a better feel for it I think in the next six months.

Kevin Kim Ellich -- Craig-Hallum Capital Group -- Analyst

Okay. So next six months. That answers I think one of my questions. And then, going back to your comment about the initiatives to purchase from major manufacturers, are you buying from all of the major manufacturers now and do you have contracts in place? If not, when do you think that will happen and how much should that help your gross margins?

Menderes Akdag -- Chief Executive Officer, President and Director

There is only one manufacturer left that we are anticipating that that's going to happen in the next two months. So by the end of September or latest by the end of the year, but we anticipate having direct relationships with all the major manufacturers.

Kevin Kim Ellich -- Craig-Hallum Capital Group -- Analyst

Okay. And is this something that's been going on across the industry with all of the e-commerce retailers like yourself or is this pretty much unique to PetMed Express?

Menderes Akdag -- Chief Executive Officer, President and Director

They are opening up to all the pet pharmacies.

Kevin Kim Ellich -- Craig-Hallum Capital Group -- Analyst

Okay. Got it. And then in the press release, you talked about investments you plan to make in your e-commerce platform to be more competitive. I guess, how much do you plan to spend this year, and how long will those investments take?

Menderes Akdag -- Chief Executive Officer, President and Director

Our current budget is about $5 million. We're anticipating to get on the new platform before the end of the year, probably it's going to be late November, early December of 2019, and our goal is to improve the user experience.

Kevin Kim Ellich -- Craig-Hallum Capital Group -- Analyst

Okay. Got it. That's helpful. What is it, like increased functionality that you plan to introduce? I guess, can you give us a little bit of color as to what the new platform will provide to improve the customer experience?

Menderes Akdag -- Chief Executive Officer, President and Director

The higher personalization, more hyper personalization, ease of use, speed, upselling, cross-selling capabilities. It will be easier also to add additional services, et cetera.

Kevin Kim Ellich -- Craig-Hallum Capital Group -- Analyst

Got it. And then, last one for me is, in the press release, again, you talked about optimizing marketing to be more competitive. I guess, are you still planning to do more TV advertising this year? I think in your K, you said, you expect it to be about -- advertising should be about 10% of sales this fiscal year. Is that still the target?

Menderes Akdag -- Chief Executive Officer, President and Director

We intend to be more efficient with our advertising spending. At this time we've paused television advertising. We may retest it, but it may be lower (Indecipherable] approach, but we'll give you a better color in the 10-Q.

Kevin Kim Ellich -- Craig-Hallum Capital Group -- Analyst

Okay. That's helpful. I'll jump back in queue. Thanks.

Operator

Thank you. Our next question comes from Anthony Lebiedzinski from Sidoti & Company. Please proceed.

Anthony Chester Lebiedzinski -- Sidoti & Company -- Analyst

Good morning. And thank you for taking the questions. So you talked about the planned e-commerce platform improvements. Just wondering if you guys have any other strategies to try to recapture some past customers and better retain current customers aside from the e-commerce site improvements?

Menderes Akdag -- Chief Executive Officer, President and Director

Right. Price reductions negatively impacted the reorders and the marketing campaign we ran was not as effective. So we should be able to do better with our current customers. Our net promoter score is at 83%. It actually improved from last year. So we should be able to do better.

Anthony Chester Lebiedzinski -- Sidoti & Company -- Analyst

Got it. Okay. And then in terms of the increased inventories, so you've mentioned also that you are now buying directly from another vendor. So is this the increased inventory -- just wanted to clarify, is the increase in inventory because of the now direct purchase relationship or is that separate?

Menderes Akdag -- Chief Executive Officer, President and Director

Separate.

Anthony Chester Lebiedzinski -- Sidoti & Company -- Analyst

All right. And then, as far as your -- just wanted to get your thoughts as far as your cash flow priorities and capital allocation strategies. You were certainly active in doing your share repurchases during the quarter. So you just wanted to get an update as to how you guys are thinking about cash flow usage?

Menderes Akdag -- Chief Executive Officer, President and Director

We still have I believe about approximately $29 million remaining in our stock buyback plan. And we're paying dividends $0.27 per quarter and we're investing, as we pointed out on our e-commerce platform.

Anthony Chester Lebiedzinski -- Sidoti & Company -- Analyst

Got it. Okay. Thank you very much.

Menderes Akdag -- Chief Executive Officer, President and Director

You are welcome.

Operator

Thank you. [Operator Instructions] Our next question comes from Erin Wright of Credit Suisse. Please proceed.

Erin Elizabeth Wilson Wright -- Credit Suisse AG -- Analyst

Great. Thanks So can you speak to where you're seeing most of the competition from the chewy.com or is it the VetSource and Vets First Choice platform or is it both? And is it across all product categories or more on OTC versus prescription side? Just wanted to get a sense of the competitive landscape. Thanks

Menderes Akdag -- Chief Executive Officer, President and Director

The competition is really coming -- the impact is coming from online competitors and its pretty much all the way across both prescription and OTC

Erin Elizabeth Wilson Wright -- Credit Suisse AG -- Analyst

Okay. And then are there other types of initiatives or offerings that you could leverage to drive new and existing customer growth? Promotions or not, maybe on solely price-based, or offerings such as like auto ship, for instance, on OTC products, does that make sense in your view?

Menderes Akdag -- Chief Executive Officer, President and Director

We do have a easy refill program, which is very similar to auto ship, and instead of a negative option, it's a positive option, because you are asked to confirm the order before we would ship. But it's very similar to an auto ship program, except it's a positive option.

Anthony Chester Lebiedzinski -- Sidoti & Company -- Analyst

Okay. And then, you spoke to the better manufacturer relationships, then I guess how much of your product as it stands today is secured through the grey [Phonetic] market, through other third-party distributors versus direct from manufacturers, do you anticipate that soon you'll be able to procure all your product direct from manufacturers, or will you have this sort of hybrid model as you see that? Thanks.

Menderes Akdag -- Chief Executive Officer, President and Director

It will be a 100% we believe in the next -- we are anticipating in the next two to three months, 100% direct.

Kevin Kim Ellich -- Craig-Hallum Capital Group -- Analyst

Great. Thank you.

Menderes Akdag -- Chief Executive Officer, President and Director

You're welcome.

Operator

Thank you. Our next question comes from Kevin Ellich of Craig-Hallum. Please proceed.

Kevin Kim Ellich -- Craig-Hallum Capital Group -- Analyst

Hey, Mendo, forget to ask a couple of things. So I guess first, you guys filed an 8-K couple of weeks ago that modified your employment agreement. Just wondering, what was the driver behind that?

Menderes Akdag -- Chief Executive Officer, President and Director

I'm not going to comment on that.

Kevin Kim Ellich -- Craig-Hallum Capital Group -- Analyst

Okay. And so -- and then wondering, we know that there's some other companies in the industry working with some of the major retailers, wondering if you guys have had any discussions or thoughts about providing any sort of white label services?

Menderes Akdag -- Chief Executive Officer, President and Director

We did have conversations with retailers, but that's all I'm going to say at this time.

Kevin Kim Ellich -- Craig-Hallum Capital Group -- Analyst

Okay. Sounds good. Thank you.

Menderes Akdag -- Chief Executive Officer, President and Director

You're welcome.

Operator

Thank you for your questions. Back to you, Mr. Mendo Akdag.

Menderes Akdag -- Chief Executive Officer, President and Director

Thank you. In fiscal 2020, we'll continue to be price competitive and we will focus on optimizing our marketing in this more competitive environment and being more efficient with our advertising spending. 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.

Operator

[Operator Closing Remarks]

Duration: 18 minutes

Call participants:

Bruce S. Rosenbloom -- Chief Financial Officer

Menderes Akdag -- Chief Executive Officer, President and Director

Kevin Kim Ellich -- Craig-Hallum Capital Group -- Analyst

Anthony Chester Lebiedzinski -- Sidoti & Company -- Analyst

Erin Elizabeth Wilson Wright -- Credit Suisse AG -- Analyst

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