PetMed Express (NASDAQ: PETS) Q3 2019 Earnings Call Transcript

PetMed Express Inc (PETS)

Q3 2019 Earnings Conference Call

Final Transcript

Corporate Participants

Bruce S. Rosenbloom

Chief Financial Officer and Treasurer | PetMed Express, Inc.

Menderes Akdag

President, Chief Executive Officer and Director | PetMed Express, Inc.

Conference Call Participants

Kevin Ellich

Ace Research | Analyst

Anthony Lebiedzinski

Sidoti & Company | Analyst

Presentation

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 December 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 non-prescription 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 providing 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, you may begin.

Bruce S. Rosenbloom

Chief Financial Officer and Treasurer | PetMed Express, Inc.

Thank you. Good morning. I’d 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 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 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, Chief Executive Officer and Director | PetMed Express, Inc.

Thank you, Bruce. Welcome everyone and thank you for joining us. Today, we will review the highlights of our financial results. We will compare our third fiscal quarter ended on December 31, 2019 to last year’s quarter ended on December 31, 2018.

For the third fiscal quarter ended on December 31, 2019, our sales were relatively flat at $59.9 million compared to $60.1 million for the same period of the prior year. The average order value for the quarter was approximately $85 compared to $84 for the same quarter of the prior year. For the third fiscal quarter, net income was $6.8 million or $0.34 diluted per share compared to $7.8 million or $0.38 diluted per share for the same quarter of the prior year, a decrease to diluted earnings per share of 10%. The decrease to net income for the quarter was mainly due to lower gross profit margins. Net income margins for the quarter sequentially improved by 180 basis points compared to the September quarter and 470 basis points compared to the June quarter.

Reorder sales increased by 1% to $53.8 million for the quarter compared to reorder sales of $53.3 million for the same quarter of the prior year. New order sales decreased by 9.9% to $6.1 million for the quarter compared to $6.8 million for the same period of the prior year. Increased online competition negatively impacted our new order sales.

We acquired approximately 76,000 new customers in our third fiscal quarter compared to 81,000 for the same period of the prior year. The seasonality in our business is due to the proportion of flee, 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 third fiscal quarter, our gross profit as a percent of sales was 29.5% compared to 32.3% for the same period a year ago. Manufacturers’ minimum advertised price policies are bringing a general pricing discipline into the market, and as a result, our gross profit margins for the quarter improved sequentially by 90 basis points compared to the September quarter and 220 basis points compared to the June quarter.

General and administrative expenses for the quarter increased by $247,000, mainly due to increased payroll. For the quarter, our advertising expenses were $3.2 million compared to $3.6 million for the same quarter of the prior year, a decrease of about 12%. Advertising cost of acquiring a customer for the quarter was $42 compared to $45 for the same quarter of the prior year.

We had $92.4 million in cash and cash equivalents and $24.2 million in inventory with no debt as of December 31, 2019. Net cash from operations for the nine months was $21.6 million compared to $32 million for the nine months last year. The decrease was mainly due to decreases in net income.

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

Questions and Answers

Operator

[Operator Instructions] Thank you. Our first question is from Kevin Ellich from Ace Research. Your line is open.

Kevin Ellich

Analyst | Ace Research

Good morning. Hey, Mendo. So I guess starting off of MAP pricing obviously having a slightly positive impact on margins, can you remind us, do you have all the major manufacturers under MAP now? Or is there still one left?

Menderes Akdag

President, Chief Executive Officer and Director | PetMed Express, Inc.

They are all under MAP, yes, all major manufacturers.

Kevin Ellich

Analyst | Ace Research

Okay, great. And then, can you give us an update — I think you guys have talked about switching over, adding on a new e-commerce platform by year-end. Did that get done? And if so, Bruce, can you remind us what the cost outlay was?

Menderes Akdag

President, Chief Executive Officer and Director | PetMed Express, Inc.

It did not get done yet. We are anticipating it’s going to happen in February. And the cost is about $5 million.

Kevin Ellich

Analyst | Ace Research

Okay, great. Great. And then, with the Presidential election coming up this year, can you give us some color on your thoughts for advertising? Are you going to stay with online advertising this year, Mendo? Are you going to add on a little bit of TV just [Indecipherable] on kind of the ad spend this year?

Menderes Akdag

President, Chief Executive Officer and Director | PetMed Express, Inc.

Majority of our advertising is going to be online. If we do any TV, it’s going to be minimal and it’s likely going to be in the spring and summer.

Kevin Ellich

Analyst | Ace Research

Got you. And then last question from me. Clearly, there is still competition, but like you said, it’s a little bit more rationalized with MAP pricing. Just wondering if you have any thoughts in terms of how fast the online or e-commerce channel is growing and kind of how we should gauge your share of that growth?

Menderes Akdag

President, Chief Executive Officer and Director | PetMed Express, Inc.

It would be a guess, so I’m not going to guess. I can tell you that veterinarians still have the majority of the market share on prescription meds, and we anticipate a continuing market share shift to direct to consumer online channel.

Kevin Ellich

Analyst | Ace Research

Great, thanks guys.

Operator

Thank you. Our next question is from Anthony Lebiedzinski from Sidoti & Company. Your company — your line is open.

Anthony Lebiedzinski

Analyst | Sidoti & Company

Thank you. And good morning and thank you for taking the question. So I guess first, I just wanted to confirm this. So as far as the increase in AOV and the gross margin sequentially, is that entirely, you think, due to MAP pricing? Or is there anything else that perhaps drove those increases?

Menderes Akdag

President, Chief Executive Officer and Director | PetMed Express, Inc.

Yeah, we’re — MAP prices helped with that, yes.

Anthony Lebiedzinski

Analyst | Sidoti & Company

Got it, okay. And can you remind us as far as the e-commerce platform — I mean, what are the main things that you’re looking to achieve through the improvements that you’re looking to do with the e-commerce platform?

Menderes Akdag

President, Chief Executive Officer and Director | PetMed Express, Inc.

The objective is to improve user experience. It has AI capabilities. So we want to do more personalization, ease of use, speed.

Anthony Lebiedzinski

Analyst | Sidoti & Company

Okay, got it. Okay, perfect. Okay. And as far as your comment about optimizing your marketing, I know, Mendo, you just mentioned about doing pretty much all online advertising. Anything else that we should think about as far as advertising spending and marketing efficiencies?

Menderes Akdag

President, Chief Executive Officer and Director | PetMed Express, Inc.

We are working on optimizing our marketing. So it was our off-peak season. We’ll be more aggressive advertising during peak season.

Anthony Lebiedzinski

Analyst | Sidoti & Company

All right. So starting in the June quarter?

Menderes Akdag

President, Chief Executive Officer and Director | PetMed Express, Inc.

It starts in March, and yes.

Anthony Lebiedzinski

Analyst | Sidoti & Company

Okay. And then lastly, cash position continues to be pretty healthy on the balance sheet. How are you guys thinking about the longer term view — your view of dividends versus buybacks?

Menderes Akdag

President, Chief Executive Officer and Director | PetMed Express, Inc.

Currently, we are paying, as you know, dividends of $0.27 per quarter. We do look at acquisition opportunities during [Phonetic] normal course of business.

Anthony Lebiedzinski

Analyst | Sidoti & Company

Okay. All right, thank you very much, and best of luck.

Menderes Akdag

President, Chief Executive Officer and Director | PetMed Express, Inc.

Thank you.

Operator

Thank you. [Operator Instructions] No questions at this time. Let me now hand the call back to our speaker for closing remarks.

Menderes Akdag

President, Chief Executive Officer and Director | PetMed Express, Inc.

Thank you. In 2020, we’ll focus on optimizing our marketing in this more competitive environment and being more efficient with our advertising spending. In addition, we will continue 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]

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