PetMed Express Inc PETS
Q3 2011 Earnings Call Transcript
Transcript Call Date 01/24/2011

Operator: Welcome to the PetMed Express Incorporated, doing business as 1-800-PetMeds conference call to review the financial results for the Third Fiscal Quarter Ended on December 31, 2010. 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 non-prescription pet medications and other health products for dogs, cats and horses direct to the consumer. 1-800-PetMeds markets its products through national television, online, direct mail and print advertising campaigns, which direct consumers to order by phone or on the Internet and aim to increase the recognition of the 1-800-PetMeds brand name. 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 - CFO: Thank you. I'd 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 current 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’ve 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, President and Chief Executive Officer of 1-800-PetMeds. Mendo?

Menderes Akdag - President and CEO: Thank you, Bruce. Welcome, everyone. Thank you for joining us. Today, we will review the highlights of our financial results. We'll compare our third fiscal quarter and nine months ended on December 31, 2010, to last year's quarter and nine months ended on December 31, 2009.

For the third fiscal quarter, ended on December 31, 2010, sales were $45.1 million compared to sales of $48.4 million for the same period the prior year, a decrease of 6.7%. For the nine months ended on December 31, 2010, sales were $180.7 million compared to sales of $188 million for the nine months the prior year, a decrease of 3.9%. The decrease was due to decreased new orders sales.

For the third fiscal quarter, net income was $4.5 million or $0.20 diluted per share compared to $5.6 million or $0.25 diluted per share for the same quarter the prior year, a decrease to earnings per share of 19%.

For the nine months, net income was $16.7 million or $0.74 diluted per share compared to $19.9 million or $0.88 diluted share a year ago, a decrease to our earnings per share of 16%. The decrease was due to lower sales, combined with a decrease in gross profit margins due to more aggressive sales promotions.

Reorder sales were relatively flat at $37.3 million for the quarter compared to reorder sales of $37.6 million for the same quarter of the prior year. For the nine months, the reorder sales increased by 4% to $142.8 million compared to $137.4 million for the same period a year ago.

New order sales decreased by 27% to $7.8 million for the quarter compared to $10.7 million for the same period the prior year. For the nine months, the new order sales decreased by 25% to $37.9 million compared to $50.6 million for the same period last year. The decreases were due to reduction in advertising and increases in customer acquisition costs.

We acquired approximately 111,000 new customers in our third fiscal quarter compared to 151,000 for the same period the prior year. We acquired approximately 515,000 new customers in the nine months compared to 681,000 for the same period a year ago.

Our average order was approximately $77 for the quarter compared to $78 for the same quarter the prior year, and approximately 72% of our sales were generated on our website for the quarter, compared to 70% for the same quarter 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 the peak seasons with fall and winter being the off seasons. For the third fiscal quarter, our gross profit as a percent of sales was 37.5% compared to 38.9% for the same period a year ago. For the nine months, our gross profit as a percent of sales 36.8% compared to 38.2% for the mine months a year ago. The percentage decrease can be attributed to more aggressive sales promotion.

Our general and administrative expenses as a percent of sales were 11.3% for the quarter compared to 10.2% for the same quarter the prior year. For the nine months the G&A expenses as a percent of sales were 9.4% compared to 9.2% a year ago. The increases in the percentages were primarily due to lower sales and increased professional fees.

For the quarter we spent $4.4 million in advertising compared to $5.2 million for the same quarter the prior year, a decrease of 14%. For the nine months we spent $21.9 million for advertising compared to $22.8 million a year ago, a decrease of about 4%. The television remnant space availability was tight in October.

Advertising cost of acquiring a customer for the quarter was approximately $40 compared to $34 for the same quarter the prior year, and for the nine months it was $42 compared to $33 for the same period a year ago. The increases were due to reduction in the response rates due to increased competition and softer demand and increase in advertising cost for the nine months.

Our working capital increased by $6.6 million to $86.1 million since March 31, 2010. The increase can mainly be attributed to cash flow generated from operations offset by dividends paid and stock repurchases.

We had $71.3 million in cash and temporary investments, $12.4 million in long-term auction rate securities investments, and $14.9 million in inventory with no debt as of December 31, 2010. Net cash from operations for the nine months was $31.5 million, compared to net cash from operations of $28.9 million for the same period last year.

Capital expenditures for the nine months were approximately $490, 000. In accordance with our share repurchase program, we repurchased approximately 66, 000 shares paying approximately $1 million during the quarter, and we repurchased approximately 326,000 shares paying approximately $5.2 million in the nine month. So far in January, we have bought back approximately 101,000 shares paying about $1.6 million.

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

Transcript Call Date 01/24/2011

Operator: Mark Arnold, Piper Jaffray.

Mark Arnold - Piper Jaffray: Can you just maybe give us your outlook for ad spending over the next year and can you give us a sense of how aggressive you're willing to be there?

Bruce S. Rosenbloom - CFO: We intend to increase the advertising. It will probably be double digit and we will be very aggressive.

Mark Arnold - Piper Jaffray: I guess on a different note, do you feel that the veterinary clinics and their distributor partners are doing a better job of keeping flea and tick customers than they have in the past?

Menderes Akdag - President and CEO: We don't think. So what the data is showing is the market share shifted to the mass retailers.

Mark Arnold - Piper Jaffray: Then, I guess this kind of a combines the last two questions, but I mean how do you turn the volume trend here around in the next few quarters from the trend we've seen here in the last four? Is it going to be more aggressive advertising spending further cutting the prices? Can you just give us a sense of kind of how you guys are looking at trying to turn this volume picture around?

Menderes Akdag - President and CEO: Sure. We have to be competitive, so we intend to have aggressive pricing strategy and we're also planning on increasing our advertising to grow at the top line.

Mark Arnold - Piper Jaffray: Then lastly from me, on the G&A line, it’s probably the highest percentage number we've seen in a long, long time. I mean, obviously, some of that is just a function of the weak revenue number, but how should we look at G&A spending over the next number of quarters?

Menderes Akdag - President and CEO: Assuming that we can grow the top line, there should be some leverage on the G&A.

Operator: Mitchell Bartlett, Craig-Hallum.

Mitchell Bartlett - Craig-Hallum: I was interested in your inventory. It looks like year-over-year it's down like 22%, a bigger percentage than the revenue decline. Going into this new pricing strategy much more aggressive, does that mean – is that a forward look at how you believe sales are going to be or are you going to have to be – feel that the product in the market is coming at cheaper? Why the inventory precisely where it is?

Menderes Akdag - President and CEO: It's just the matter of timing, that means there was not good buying opportunities at the time in December. So that's all as far as inventory is concerned.

Mitchell Bartlett - Craig-Hallum: There's plenty of inventory in the market?

Menderes Akdag - President and CEO: We are anticipating that there will be.

Mitchell Bartlett - Craig-Hallum: In the pricing strategy that you talked about, is it going to be more aggressive than what we can see on your website right now? It seems like you did get a little bit more aggressive here recently. Is this indicative of what you are planning a roll-out?

Menderes Akdag - President and CEO: Probably, yes. We're still doing some testing and we have not made a final decision yet, but by March you will see what the pricing is going to be.

Mitchell Bartlett - Craig-Hallum: Can you help us with the split between pharmaceuticals and non-pharmaceuticals?

Menderes Akdag - President and CEO: Over-the-counter meds were down and prescription was up. So that trend has continued in the December quarter.

Mitchell Bartlett - Craig-Hallum: Will OTC be greater than 50% in the seasonal peak quarters?

Menderes Akdag - President and CEO: Yes. Mostly likely, yes.

Operator: Anthony Lebiedzinski, Sidoti & Company.

Anthony Lebiedzinski - Sidoti & Company: Just a follow-up on that question. Can you give us the percentage of your sales coming from prescription sales now versus non-prescription?

Menderes Akdag - President and CEO: I am not going to do that right now, but will give that to you for the year and the fiscal year at March 31.

Anthony Lebiedzinski - Sidoti & Company: In terms of the advertising strategy, do you plan to make any changes to how you allocate your advertising dollars between TV and Internet and other media?

Menderes Akdag - President and CEO: Probably not, we are planning on increasing all of them.

Anthony Lebiedzinski - Sidoti & Company: Also, you talked about increasing your product offerings in the pet supplies, can you give us a sense as to how many SKUs you plan to offer there, how many more SKUs and also what the margin profile is of pet supplies versus your other products?

Menderes Akdag - President and CEO: We are drop shipping the pet supplies, the number of SKUs theoretically can be infinite, so, because we are carrying the inventory ourselves. Having said that, we survey and research the products, so we attempt to carry the products that we think our customers are going to like.

Anthony Lebiedzinski - Sidoti & Company: The margin profile of those products versus your others?

Menderes Akdag - President and CEO: Much lower, it’s going to be much lower than our average.

Operator: (Edward Woo, Wedbush Securities).

Edward Woo - Wedbush Securities: You mentioned a lot about competitive nature being very increased. Is it just in flea and tick, because it seems to be that is the main category being carried by (math) or is it across all your product categories?

Menderes Akdag - President and CEO: Yes, flea and tick is the main issue probably some of the supplements also.

Edward Woo - Wedbush Securities: On the flea and tick we’ve seen some inventory issues with Frontline and we know that advantage has gone direct. Has there been any change in that more recently?

Menderes Akdag - President and CEO: At this time, no. There has been change.

Operator: Ross Taylor, CL King.

Ross Taylor - CL King: I have two questions. First, you mentioned on advertising, you plan to be pretty aggressive and I just wondered if you can give us any indication as to how high you might go for customer acquisition cost. Second question, and you may have already answered this to some extent, but your mute pricing strategy, do you think that's going to be sort of across the board lowering prices or more discounting? Second component to that question is it going to be more or less across all product lines or just focused on some of the more competitive ones like flea and tick?

Menderes Akdag - President and CEO: It will be focused on the competitive ones. So obviously we need to be competitive and we will only reduce the prices where we need to be. As far as customer acquisition cost is concerned, we'll see where it ends up. Our focus is growing sales and we'll be aggressive to do that.

Ross Taylor - CL King: Maybe I didn't asked one of them very clearly, but do you think it's going to be kind of an across the board price reduction strategy or just more coupons and discounting for your select customers or…?

Menderes Akdag - President and CEO: Price reduction in certain categories is what it's going to be.

Operator: Mitchell Bartlett, Craig-Hallum.

Mitchell Bartlett - Craig-Hallum: Can you tell us what the average life of a customer is? It's important because over the last year or so as you noted that there is a lot less new customers that you've generated and so maybe that they are a substantial part of the base of customers and therefore we came all that way. Can you help us there?

Menderes Akdag - President and CEO: Obviously, pets die but typically the pet owners get a new pet, may be later on and may be another in a year or so they get a new pet. So, theoretically you never lose customer after a pet dies. You may lose them temporarily. Typically, after the second, third year of being with us, the retention rate is very high.

Mitchell Bartlett - Craig-Hallum: Would the average life be over?

Menderes Akdag - President and CEO: I'm not going to give you an average life.

Mitchell Bartlett - Craig-Hallum: You mentioned in the prepared text that the advertising market was tight in October and you specifically called out October. November and December, did it loosen up and is the COCA that you reported the, Cost of Customer Acquisition that you reported, is that indicative of a really high cost in October and much less in the following months or how did it trend?

Menderes Akdag - President and CEO: October was tight. November and December were not as bad. I'm not going to get into monthly reporting, so the average was $40.

Operator: Thank you. I'm currently showing no further questions. I'd like to turn it back over to our speakers for closing remarks.

Menderes Akdag - President and CEO: Thank you. To address the decrease in sales, going forward, we intend to implement a more aggressive pricing strategy combined with increased advertising while continuing to expand our product offerings into pet supplies. This wraps up today's conference call. Thank you for joining us. Caroline, this ends the conference call.

Operator: Thank you. Thank you for your participating. You may now disconnect.