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PetMed Express Inc (PETS) Q4 2018 Earnings Call Transcript

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PetMed Express Inc  (NASDAQ: PETS)
Q4 2018 Earnings Call
May. 06, 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 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 term 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 and Treasurer

Thank you. I would like to welcome everyone 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 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?

Menderes Akdag -- Chief Executive Officer, President and Director

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 3, 2019, our sales were $64.6 million, compared to sales of $67.3 million for the same period the prior year, a decreased from 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 orders sales, and the increase in sales for the fiscal year was due to increases in reorders sales. Increased online competition negatively impacted the sales for the quarter.

The average or the 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 sales, 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 dollars 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 orders 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 as 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 as 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 readdition 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. Operators, we are ready to take questions.

Questions and Answers:

Operator

Certainly. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Kevin Ellich of Craig-Hallum. Please proceed.

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

Good morning. Thanks for taking my questions, Mendo. I guess, let's start off with the increased advertising spend of $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?

Menderes Akdag -- Chief Executive Officer, President and Director

The late February was when the television advertising started.

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

Okay, and thoughts on ad spend for fiscal '20?

Menderes Akdag -- Chief Executive Officer, President and Director

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

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

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 you're planning?

Menderes Akdag -- Chief Executive Officer, President and Director

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

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

Okay, that 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 pricing? Any thoughts.

Bruce S. Rosenbloom -- Chief Financial Officer and Treasurer

It's the later. 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.

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

Okay. And then last one for me is, we all know there is lot of competition in the marketplace, where there are 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.

Menderes Akdag -- Chief Executive Officer, President and Director

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

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

Okay, thank you.

Menderes Akdag -- Chief Executive Officer, President and Director

You're welcome.

Operator

Thank you. Our next question comes from Erin Wright of Credit Suisse. Please proceed.

Erin Elizabeth Wilson Wright -- Credit Suisse -- Analyst

Great. Thanks. Another question on the competitive landscape here. I'm just curious where most of it's stemming from? Is it mostly from the Chewy.com of the world and with Petco and 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 think kind of -- I guess better positioned yourselves in terms of those competitive dynamics? Thanks.

Menderes Akdag -- Chief Executive Officer, President and Director

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

Erin Elizabeth Wilson Wright -- Credit Suisse -- Analyst

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 parasiticide. 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. Thanks.

Menderes Akdag -- Chief Executive Officer, President and Director

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

Erin Elizabeth Wilson Wright -- Credit Suisse -- Analyst

Okay, great. Thank you.

Menderes Akdag -- Chief Executive Officer, President and Director

You're welcome.

Operator

Thank you. (Operator Instructions) Our next question comes from Anthony Lebiedzinski from Sidoti and Company. Your line is now open.

Anthony Chester Lebiedzinski -- Sidoti and Company -- Analyst

Yes. Thank you and good morning -- for taking my questions.

Menderes Akdag -- Chief Executive Officer, President and Director

Good morning.

Anthony Chester Lebiedzinski -- Sidoti and Company -- Analyst

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

Menderes Akdag -- Chief Executive Officer, President and Director

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

Anthony Chester Lebiedzinski -- Sidoti and Company -- Analyst

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

Menderes Akdag -- Chief Executive Officer, President and Director

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

Anthony Chester Lebiedzinski -- Sidoti and Company -- Analyst

Got it, right. And as far as the advertising strategies. So you mentioned double-digit increases 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?

Menderes Akdag -- Chief Executive Officer, President and Director

There's a significant cost increase online due to the more competitive market. So 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 our ROI. So we'll see where it -- how it shapes up.

Anthony Chester Lebiedzinski -- Sidoti and Company -- Analyst

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

Menderes Akdag -- Chief Executive Officer, President and Director

That's a possibility.

Anthony Chester Lebiedzinski -- Sidoti and Company -- Analyst

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?

Menderes Akdag -- Chief Executive Officer, President and Director

I believe it's CapEx, primarily CapEx.

Anthony Chester Lebiedzinski -- Sidoti and Company -- Analyst

Got it. All right, thank you. Best of luck.

Menderes Akdag -- Chief Executive Officer, President and Director

Thank you.

Operator

Thank you. A follow-up question comes from Kevin Ellich of Craig-Hallum. Please proceed.

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

Hey, 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 the 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?

Menderes Akdag -- Chief Executive Officer, President and Director

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

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

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

Menderes Akdag -- Chief Executive Officer, President and Director

We hope so.

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

Okay. And yes, that's it from me. Thanks.

Menderes Akdag -- Chief Executive Officer, President and Director

You're welcome.

Operator

Thank you. We have another question on queue was coming from Anthony Lebiedzinski of Fidelity. Please proceed.

Menderes Akdag -- Chief Executive Officer, President and Director

Okay, one final question.

Anthony Chester Lebiedzinski -- Sidoti and Company -- Analyst

Yeah, good morning, guys. Yeah. So as far as -- just the reorder sales comment that I was just wondering. So was it all pricing? So just wondering as far as the number of orders from reorder customers, was that kind of flat or up and then it was all negatively impacted by pricing? Just wanted to get a better clarification on that?

Bruce S. Rosenbloom -- Chief Financial Officer and Treasurer

Yeah, orders were up about 0.5%. So the rest of the decline in sales is due to lower pricing.

Anthony Chester Lebiedzinski -- Sidoti and Company -- Analyst

Got it. Thank you for that.

Menderes Akdag -- Chief Executive Officer, President and Director

You're welcome.

Operator

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

Menderes Akdag -- Chief Executive Officer, President and Director

Hi, thanks for taking the question. So a 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 authorization. So is that actually happening and maybe has that had any kind of effect? Thank you.

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

David Michael Westenberg -- Guggenheim Partners -- Analyst

So the conversion is actually improving, do you think actually maybe that is -- maybe a build on effect because there are now the Chewy's in the (inaudible) vet store?

Menderes Akdag -- Chief Executive Officer, President and Director

It's possible.

David Michael Westenberg -- Guggenheim Partners -- Analyst

Okay. Thank you very much.

Menderes Akdag -- Chief Executive Officer, President and Director

You're welcome.

Operator

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

Bruce S. Rosenbloom -- Chief Financial Officer and Treasurer

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 the better service our customers. This wraps up today's conference call. Thank you for joining us. Operators, this ends the conference call.

Operator

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.

Duration: 20 minutes

Call participants:

Bruce S. Rosenbloom -- Chief Financial Officer and Treasurer

Menderes Akdag -- Chief Executive Officer, President and Director

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

Erin Elizabeth Wilson Wright -- Credit Suisse -- Analyst

Anthony Chester Lebiedzinski -- Sidoti and Company -- Analyst

David Michael Westenberg -- Guggenheim Partners -- Analyst

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