Q3 2023 Petmed Express Inc Earnings Call
Participants
Brian Prenoveau; IR; MZ Group
Mathew Hulett; President & CEO; PetMed Express, Inc.
Christine Chambers; CFO, Treasurer, & Company Secretary; PetMed Express, Inc.
Ryan Meyers; Analyst; Lake Street Capital Markets, LLC
Presentation
Operator
Good afternoon, everyone, and thank you for joining the PetMed Express third quarter preliminary financial results conference call. My name is from [Shamali], the operator for today's call.
I would now like to pass the conference over to our host, Mr. Brian Prenoveau, Investor Relations.
Brian Prenoveau
Thank you, operator. And I'd like to welcome everybody here today to the PetMed Express fiscal third quarter preliminary financial results conference call. 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 of 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 of the operations or business or financial condition of PetMeds.
PetMeds 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.
Now let me introduce our CEO and President, Mathew. Mat?
Mathew Hulett
Thank you, Brian. Thank you to everyone for making the time today to participate in today's conference call. Today's call will follow a slightly different format than recent calls. As many of today's listeners likely saw, this afternoon, we filed an 8-K and issued a press release announcing a planned restatement of certain previously issued financial statements due to errors in accounting for certain tax-related matters. Please reference those documents for additional information regarding those factors that may affect the restatement of our financial statements.
Additionally, due to the administrative burden and the process required for a multi-year restatement, our 10-Q for fiscal year 2024's third quarter ended December 31, 2023 will be delayed. The restatement and the delay in this quarter's 10-Q filing are due to errors in the accounting treatment related to certain previously reported tax-related items.
As you recall, our Chief Financial Officer, Christine Chambers, first discuss the identification of the need for a sales tax accrual in the second fiscal quarter of last year and provided an update on the fiscal fourth-quarter call. The restatement pertains in part to the recording of this sales tax accrual.
I want to stress a few things. Number one, we are working together with all of our relevant partners and consultants to finalize the accounting treatment and complete the restatement as quickly as possible. Number two, the restatement has no impact on our day-to-day business operations or on our strategy. And number three, the restatement is a matter of accounting for tax-related items, and there's no impact on our current cash balance. Christine will be discussing this accounting issue in more detail during her portion of the call.
We would like to spend the remainder of the time on today's call discussing progress made in the business and sharing some high-level specifics from the fiscal third quarter. For the quarter ending December 31, 2023, PetMeds delivered sales of $65.3 million compared to sales of $58.9 million in the prior year, an increase of 11% year over year, including from our recent acquisition of PetCare Rx. We reported a gross margin of 27.4%, which was in line with our expectations. This reflects a balance between promotional activities intended to introduce food to our customers and a regimented focus on maintaining our historical gross margin as an overall business.
Returning customers accounted for sales of $57.7 million during the quarter, reflecting a growth of 8% year over year related to the addition of the PetCareRx business. In terms of our initiatives to offer more products and provide more value to our existing pet parent customers, we focused intensely on raising awareness about our food catalog at both the category and brand levels. Additionally, we are enhancing our cross-sell initiatives through our e-mail CRM, call center, and website.
Along those lines, we are excited to announce the addition of another major food brand of PetMeds in the coming months. We have entered into a partnership with Hill's Pet Nutrition and are launching Hill's Science Diet this quarter, a premium category known for its tailor-made nutrition that promotes healthy skin, coat, and immune system in pets. Hill's Science Diet will start to rollout as early as next month.
Premium food brands are important relationships for PetMeds, and this expansion was accelerated in part due to our acquisition of PetCareRx. Prescription and premium food are important categories for PetMed as our pet parents are very health and wellness focused. Simply put, our customers want premium food and prescription food options, and we'll be leaning in heavily on this brand as well as new ones as we continue to go to market in the pet food category.
We believe these additional food options provide us the ability to interact with our customers more often, increase the average order size, and enhance the lifetime value of each customer.
Let's turn to our operational advancements and initiatives. We have talked about our key performance indicators for the transformation of the business, successfully providing more product offerings to our current customers, increasing our recurring customer base and driving recurring revenues. A key business model driver for the pet meds business is to expand the number and types of products. Our core prescription customer base buys from us for will buy from us on a recurring basis. We believe that our new Autoship platform, which was recently launched will help facilitate the long term compounded benefit and expanded customer loyalty by delivering exceptional value. This new Autoship and save capability enhances our current capabilities to include more pet parent control over their ordering experience, including activities like controlling the subscription duration, pausing or accelerating subscription and adding additional product. We have also integrated our vet life functionality, which connects pet parents to licensed veterinarians over a digital connection, 24 seven, which is now available for all of our Autoship and save customers on a complementary basis. We believe the more products that pet parent uses on our Autoship program, the more loyal they become our Autoship and save and pet PLUS programs grew to 52% of our revenue during this last fiscal quarter, a substantial increase from 42% of revenue for the same time last year. I will now turn the call over to our CFO, Christine Chambers, to provide an overview of the quarter's financials.
Christine Chambers
Thanks, Matt. I wanted to first address the restatement announced in the eight K earlier this afternoon, and then I will address selected preliminary third quarter results fiscal year 2024 in our previously issued annual financial statements for fiscal year 2023, we determined that an accrual for sales tax was required and we recorded a sales tax accrual in the period based on a determination that the sales tax liability was probable and estimatable and that it was in accordance with what we believe to be the appropriate guidance from GAAP in the third quarter of fiscal year 2024, the company reviewed in conjunction with our auditors, RSM, the accounting treatment related to the previously reported sales tax accruals as well as the accounting treatment related to the deferred tax benefit associated with the Company's acquisition of pet care Rx in April 2023. As a result of the review, the audit committee of our board has concluded based on management's determination that the Company misapplied GAAP as it relates to the sales tax liabilities, the prior period included in the second quarter and fourth quarter of fiscal year 2023. The deferred tax asset reported in the first and second quarter and fiscal year 2024, the Company expects the impact of the restatement to affect multiple periods. The most significant impact to the income statement is expected to be a decrease in general and administrative expense fiscal year 2023 in the range of six to EUR8 million and the corresponding increase in net income for the same period. This amount was originally recorded as a sales tax liability based on a probable and estimable approach in fiscal year 2023, rather than the correct legal liability approach under which the maximum potential sales liability would have been recorded beginning in fiscal year 2020. The restatement is expected to require the Company to revise and record a sales tax liability of approximately 14 to $20 million as of March 31st, 2020. Because this liability gets adjusted in subsequent periods. As of March 31st, 2023, we expect to record a maximum potential sales tax liability of approximately 16 to 23 million. In addition, the accounting related to the valuation of the carried forward net operating loss resulting in an overstated deferred tax asset reported at June 30th and September 30th, 2023, related to the pet care Rx acquisition will also be revised. This will increase goodwill and decrease the deferred tax asset on the balance sheet. This revision is the result of a technical tax matter surrounding a limitation adjustment to the net operating losses acquired. The Company believes that this value represents the expected impact of the restatement on the Company's prior financial statements deliver further adjustments may arise. It is important to note that while unfortunate the restatement is not expected to have an impact on the Company's fiscal year 2024 revenue or cost of sales sold. It does not impact our current cash balance. The restatement is not expected to impact our day-to-day business operations, all strategic priorities. As a result of the level of administrative effort and time associated with completing the restatement, the company will experience a delay in the filing of its quarterly report on Form 10 Q for the quarter ended December 31st, 2023, and expects to file a notification of late filing with the SEC to reiterate this quarter due to the restatement process, we cannot comment on numbers below the gross profit line as a restatement could potentially impact G&A. Today, I will report our selected preliminary third quarter fiscal 2024 results for the quarter ended December 31st, 2023. As a reminder, this will be the third quarter of combined results, including the acquisition of pet care Rx compared to results for PetMeds own fiscal year 2023 third quarter sales was 65.3 million compared to sales of 58.9 million in the same period last year, representing growth of 11% year over year. The growth was due to incremental sales from the acquisition of pet care Rx, partially offset by declines in pet medicine, legacy new order and reorder sales. We continue to experience a single digit decline in pet meds legacy real estate. We welcomed approximately 67,000 new pet parents this quarter compared to nearly 72,000 in the prior year. The decline year over year is primarily due onetime promotion in the same period last year that we tested and intentionally did not repeat, they did not attract high order value customers.
Reorder sales were $57.7 million for the quarter, an increase of 8% compared to reorder sales of 53.3 million from the same period.
Yes, we've continued to grow our recurring revenue, including Autoship and save sales and pet care Rx membership sales the percentage of total sales. This drives greater engagement and strengthens our recurring sales base. Recurring sales as a percentage of total sales was 52% in the quarter, up sequentially from 51% in the prior quarter and up from 42% for the same period last year. Gross profit for the quarter as a percentage of sales was 27.4% compared to 25.9% in the same quarter last year and 28.3% in the prior quarter. The increase year-over-year was due to lower promotions compared to the prior year. As of December 31st, 2023, we had approximately 49.4 million of cash and equivalents on hand and no debt.
Now I will turn the call back to Matt for some concluding remarks.
Mathew Hulett
Thanks, Christine. As the CEO of this Company, I've always promise to lead with full transparency, providing financial statements that can be relied upon as fundamental and Paramount to running a public company. In an effort to provide complete and accurate financial statements, we recorded an additional sales tax accrual during fiscal 2023 and unfortunately later determined that gap was misapplied in doing so despite having to correct this, I want to reiterate that our focus remains on operating the business and on executing our strategy, our pet health care strategy revolves around four key pillars, medication care, nutrition and wellness PetMeds is focused on executing our initiatives to offer a broader range of products and services to our core pet meds customer base. On a recurring basis, the announcement of adding a new premium food brand, along with a major upgrade to our Autoship and save infrastructure represents significant milestones in the journey to transform PetMeds into a trusted pet health expert. This will deliver more value to new pet parents as well as our existing 2 million customers. With these statements, we conclude our prepared remarks for today. Operator, we are now prepared to take questions. Thank you.
Question and Answer Session
Operator
(Operator Instructions) Ryan Meyers, Lake Street Capital Markets.
Ryan Meyers
And guys, thanks for taking my questions. First one for me. Just a couple on the actual restatement itself. Can you just discuss or explain what actually happened with the sales tax accrual?
And essentially how this AIR happened.
Christine Chambers
My name is Christine, and I'm glad you asked the question.
Thank you.
And there are three very important things that need to be taken away. And first thing I'll start with is this is the same issue when identified and discussed last year related to our historical a period sales tax and exposure related to that, the difference is surrounded by the accounting treatment. So just to reiterate, this is not the result of any new facts or new analysis.
It's about the accounting treatment for.
Secondly, let me just talk about the accounting treatment. There are two different ways to account for prior period sales tax liabilities says you can apply a full 50, which is based on, as I mentioned, this probable and estimatable approach.
The other way that you can look at this is by applying ASC. four oh five, which is based on a legal liability approach, this is data more strict interpretation and improves what's important this accrues to the maximum legal liability.
Now we believe that four or five is better than it's been for 50.
Again, when you're looking at a if you look at it accounting applications, they're often about judgment historically, that has been diversity of factors applied to this issue some, but we just reiterated that we believe now for oh five is applicable.
This is for 50.
Thirdly, data for the last thing I want is one just yes, just to reiterate, it allows us I think, yes, what I'm while having to restate is really disappointing. And we are as Matt and I've mentioned submitted, we're operating with the highest standards of transparency and making sure that we provide transparency and integrity, and we proactively identified the issue late in the third quarter. We've begun working with our partners at each results, so we're working on this as quickly as possible. And we'll we'll get more as soon as we can.
Ryan Meyers
Got it. That's helpful to understand. And then you talked previously the accrual was the originally estimated about 68 million. Now it sounds like it's obviously going to be quite a bit more than that. Does that mean you guys will be paying much more in that sales tax once those accruals go through or how should we be thinking about the taxes once you're able to revise this issue?
Christine Chambers
Yes. I think into the great question, again, no change, Brian, to our approach or strategy and in resolving sales had met sales tax issues with the state. And we've demonstrated a history of most settlements with states them. And again, our analysis of what is probable and estimable has not changed. So no change to our tax strategy with resolving these reserve tax matters, accounting change.
Ryan Meyers
Okay, got it. And then just kind of switching gears here to the actual fundamentals of the business. I'm just wondering if you can comment on if you've seen further stabilization of the core pigments business.
Are there maybe a little bit more commentary on what you're seeing there?
Mathew Hulett
Yes, I can take that, Christine, Ryan, thanks for the question on. Yes, I think in the in the call, you obviously noted that the returning core and as customer base we noted by is declining relatively at the same rate from previous quarters. And you know, the really the big the big comment there, I would say is the core returning base of customers to pet meds. And the answer that we've really been focused on as a company is getting more of our customers on Autoship because our Autoship business is growing and those customers churn less. And then two in parallel upgrading that platform, which I noted on the call, and I've mentioned this on several calls, but just to add a little bit more color to that. The Autoship and save infrastructure was sitting on a very legacy old platform. We spent about a year getting ready to do two things. One to adopt that order management system that enables us to really build brands around distributing products, interacting with drop shippers, interacting with different warehouses and then also an order subscription platform that enables the consumer as well as as us as the back end to have a much more flexible system. The old system was not really what I call industrial grade and we think that this new platform that we just released just several weeks ago is going to be a really good answer to stabilizing the returning customer base with pet meds. We've noted in our Autoship sales as a percent of overall sales around 50%. We'd like to be a lot higher than that. Our original goal is 50%. We know that other direct-to-consumer brands have a much higher percent and we couldn't have done that unless we made this investment about a year ago to upgrade the system. So in a long winded way more customers on Autoship, buying more customers, more products from from pet meds, including food and this Autoship and save platform, we think is going to be a key future unlock to really stabilize that base because it's a much more stable place.
Ryan Meyers
No, not if you're not if you're working with them, we've got it. And then last question for me. Just wondering if you can comment on the food business, I know that's obviously a newer piece of the business, but any sort of contribution you guys saw there during the quarter or how we should think about that business is trending?
Mathew Hulett
Yes, thanks for that. Well, Lee, the answer there is two parts. One is getting food brands signs that our customers want. And I had a little bit of color on that. And then two is executing on getting more products that our customers want in the Autoship program. So on the first part, we are currently expanding our relationships with many of the top prescription and premium food brands. We just announced that we'll be launching Hill's this quarter, Hill's Science Diet, and we'll be launching and announcing new deeper partnerships with these premium brands in the future. And that's a huge deal for our customers. Our customers, our very health-conscious, they go to the vet a lot. They want premium food and prescription products, given our prescription medication background, getting those types of brands online is large because we know definitively how many of our customers use those brands. So that's the first unlock, get the brands and get them signed.
The second is executing on that.
And we've seen a large growth in our food sales as a percentage of sales which is very low. It's our fastest growing category. And so as we get better and go to market as we get better at marketing the right brands to our customers that should continue to be a really good trend for the business.
Ryan Meyers
Got it.
Thanks for taking my questions.
Great.
Thank you.
Operator
Thank you. And we have reached the end of the question and answer session. I'll now turn the call back over to Matthew LX4 closing.
Mathew Hulett
Yes.
Thanks, everybody, for joining us today. Although it was unfortunate news today regarding the tax liability issues, and the accounting change. We hope that that doesn't overshadow our excitement as a management team about the future of pet meds as we transform from a single category pet medication business to a broader pet health expert business. We're excited about continuing to articulate our milestones along this journey. And thank you very much for your time and attention today.
Thank you, operator.
We're all done here. Thank you very much.
Operator
Thank you. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.
No, and I will bill?
Yes, yes, yes.
