PetMed Express Inc. (PETS) Q1 2020 Earnings Call Transcript

PetMed Express Inc. (NASDAQ: PETS) Q1 2020 earnings call dated July 20, 2020

Corporate Participants:

Bruce S. Rosenbloom — Chief Financial Officer

Menderes Akdag — President and Chief Executive Officer

Analysts:

Anthony Lebiedzinski — Sidoti & Company — Analyst

Ben Rose — Battle Road Research — Analyst

Kevin Ellich — Ace Research — Analyst

Presentation:

Operator

Welcome to the PetMed Express Incorporated, doing business as 1-800-PetMeds, Conference Call to review the financial results for the First Fiscal Quarter ended on June 30, 2020. At the request of the Company, this conference 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 and horses 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 PetMed’s family of brand names. 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. Mr. Rosenbloom, please go ahead.

Bruce S. Rosenbloom — Chief Financial Officer

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’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 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’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, the President and Chief Executive Officer of 1-800-PetMeds. Mendo?

Menderes Akdag — President and Chief Executive Officer

Thank you, Bruce. So, welcome and thank you for joining us.

During the June quarter, consumer demand continued to be strong for e-commerce, with pet owners shifting their purchases to online. Our sales have been positively impacted due to this increased demand coinciding with our peak season. As an essential business, we have been open during our normal business hours without any material disruptions in our operations. We have also taken measures to ensure the health and safety of our employees. We have implemented working from home where possible and [Indecipherable] of our workplace. Also, so far, we have not seen any material disruptions in our supply chain. But as a precaution, we have temporarily increased our inventory during the quarter.

Now we’ll compare our first fiscal quarter ended on June 30, 2020 to last year’s quarter ended on June 30, 2019. For the first fiscal quarter ended on June 30, 2020, sales were $96.2 million compared to sales of $80 million for the same period the prior year, an increase of 20%. The increase in sales was due to increases in new order and reorder sales. Our average order value was approximately $89 for the quarter compared to $86 for the same quarter last year.

For the first fiscal quarter, net income was $7.8 million or $0.39 diluted per share compared to $5.3 million or $0.26 diluted per share for the same quarter last year, an increase to diluted earnings per share of 47%. In addition to sales growth, operating income margin improvement of 2.1% positively impacted earnings.

New order sales increased by 29% to $15.8 million for the quarter compared to $12.2 million for the same quarter the prior year. Reorder sales increased by 19% to $80.4 million for the quarter compared to reorder sales of $67.7 million for the same quarter last year. We acquired approximately 186,000 new customers in our first fiscal quarter compared to 140,000 for the same period the prior year. 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 seasons, with fall and winter being the off-season.

For the first fiscal quarter, our gross profit as a percent of sales was 27.8% compared to 27.3% for the same period a year ago, a 50 basis points improvement.

General and administrative expenses increased by approximately $1.2 million for the quarter. The majority of this increase was related to increased payroll expenses, bank service fees and telephone expenses. Stock related compensation increased by $430,000 due to an increased stock price. The additional expenses of approximately $240,000 were incurred due to COVID-19, which included the increased payroll, telephone and sanitation expenses.

We spent $9 million in advertising for the quarter compared to $8.6 million for the same quarter of the prior year, an increase of about 5%. Advertising cost of acquiring a customer for the quarter, defined as total advertising expenses divided by total new customers acquired, was approximately $48 compared to $62 for the same quarter a year ago, a 21% improvement.

We had $86.8 million in cash and cash equivalents and $43.1 million inventory, with no debt as of June 30, 2020. Cash from operations for the quarter was negatively impacted by a $25.2 million increase in inventory as a precaution due to possible shortages as a result of COVID-19. 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] And the first question comes from Anthony Lebiedzinski of Sidoti & Company. Sir, please go ahead.

Anthony Lebiedzinski — Sidoti & Company — Analyst

Good morning and thank you for taking the questions.

Menderes Akdag — President and Chief Executive Officer

Sure.

Anthony Lebiedzinski — Sidoti & Company — Analyst

So first, as far as the sales increase, part of the sales increase was an increase in AOV. Some — perhaps, Mendo, if you could maybe expand on what drove the increase in the average order value.

Menderes Akdag — President and Chief Executive Officer

Our campaigns have encouraged the upselling and cross-selling, so that was the reason for the increase.

Anthony Lebiedzinski — Sidoti & Company — Analyst

Got it. Okay. And as far as the gross margin, obviously, it was up from a year ago, but sequentially down from the last, really three quarters. You were tracking above 29% the last couple of quarters. So, can you just expand on that? Are you seeing more competition? Or is something else is driving the sequential downtick in the gross margin?

Menderes Akdag — President and Chief Executive Officer

Sure. Product mix was different. We had more over-the-counter sales that has lower margins. Also, reorders [Indecipherable] the quarter that caused higher loyalty program or on-credit [Phonetic] accruals which negatively impacted gross margins.

Anthony Lebiedzinski — Sidoti & Company — Analyst

Okay. Great. Thank you for that. And then the last question from me. As far as the inventory increase, was this across the board or were there any certain product categories that you focused on thus far as for your inventory increases?

Menderes Akdag — President and Chief Executive Officer

Fast-movers were the ones that we increased the inventory. We intend to return to normal inventory levels starting in this quarter. With that, we are in.

Anthony Lebiedzinski — Sidoti & Company — Analyst

Okay. All right. Thank you and best of luck.

Menderes Akdag — President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Our next question comes from Ben Rose of Battle Road Research.

Ben Rose — Battle Road Research — Analyst

Yes. Good morning, Mendo, and good morning, Bruce.

Menderes Akdag — President and Chief Executive Officer

Good morning.

Ben Rose — Battle Road Research — Analyst

So, I don’t know that the actual results have come across the wire. But could you repeat the new order sales number, if you don’t mind?

Menderes Akdag — President and Chief Executive Officer

Sure. New orders, they increased by 29% to $15.8 million for the quarter compared to $12.2 million for the same quarter last year.

Ben Rose — Battle Road Research — Analyst

Okay. Great. So this is obviously by far and away the largest percentage increase that you’ve had in new order sales. Reorder sales have been trending up. But just to focus on the new order sales for a moment, could you maybe just speak to what accounts for such a dramatic shift? Was it in part this shift to the over-the-counter medications or was it perhaps a change in the way your advertising or reaching out to new customers?

Menderes Akdag — President and Chief Executive Officer

Demand has been strong for e-commerce and that coincided with our peak season. So that helped new orders. Also, we advertised — our advertising was more effective. Advertising pricing was more favorable in the quarter, and demand was strong, as I said.

Ben Rose — Battle Road Research — Analyst

Okay. Just in a general sense, I think what may be on the mind of many investors is, kind of looking out over the next year or so, year and a half, what is the general plan for PetMeds to sustain and perhaps extend its market share gains that you’ve seen now for the last couple of quarters due in part to the crisis?

Menderes Akdag — President and Chief Executive Officer

Continue advertising, and also, we are working on redesigning our website and mobile app to optimize the user experience, personalization and using artificial intelligence is the focus for this fiscal year.

Ben Rose — Battle Road Research — Analyst

Okay. And if I may, just one more for Bruce with the inventory build. Were there perhaps some favorable terms that the drug manufacturers were offering or was it sort of normal pricing for you to get the inventory that you needed?

Bruce S. Rosenbloom — Chief Financial Officer

So, for the most part, it was normal pricing. It was really more of a reaction to increased sales, increased demand and stocking up on inventory. Obviously, hitting higher inventory levels allows us to I guess hit volume requirements for us to receive, I guess, better rebates down the road.

Ben Rose — Battle Road Research — Analyst

Okay. Thank you very much.

Bruce S. Rosenbloom — Chief Financial Officer

You’re welcome.

Operator

[Operator Instructions] The next question is from Kevin Ellich of Ace Research.

Kevin Ellich — Ace Research — Analyst

Good morning, guys. Hey, Mendo. Good morning, Bruce. With the sales mix increase to OTC that you cited, were there specific promotions this quarter? Or was it maybe more with coronavirus, do you think that led to fewer vet business and that what drove the over-the-counter increase?

Menderes Akdag — President and Chief Executive Officer

Probably yes. The veterinarian offices, some of them were closed. So that shifted the sales from prescription to OTC. Also, brick and mortar retailers were closed.

Kevin Ellich — Ace Research — Analyst

Okay. That makes sense. And then, with the advertising spend, even though new customer acquisition cost was lower year-over-year, do you think that trend is going to continue? And on top of that, is the $9 million — or 9% as a percent of sales a target for the year? I can’t remember if I saw that in the K or not.

Menderes Akdag — President and Chief Executive Officer

I believe, in the 10-K we have 9% as a percent for the year. It’s going to fluctuate from quarter to quarter depending on the advertising availability and if the pricing is favorable or not to us. We budgeted more than last year, so we’ll be more aggressive during peak season when demand is stronger. So we’ll see what happens.

Kevin Ellich — Ace Research — Analyst

Got it. That makes sense. And remind me — you’re spending primarily on online advertising, right? Are you — have you launched any new TV campaigns?

Menderes Akdag — President and Chief Executive Officer

We do have TV campaign, but it’s small. The majority of the money is being spent on the online, digital.

Kevin Ellich — Ace Research — Analyst

Okay. Got it. Got it. And then lastly, clearly we saw a lot of competition in the last couple of years coming from other big online retailers as well as maybe the vet channel trying to increase their e-commerce platforms. Have you seen any change in the competitive landscape?

Menderes Akdag — President and Chief Executive Officer

Online was very competitive, and prices stabilized in the markets with manufacturers enforcing MAP policies. Veterinarians still have the majority of the market share on prescription medications, and that’s really the opportunity. We anticipate continuing market share shift to direct to consumer online channel.

Kevin Ellich — Ace Research — Analyst

Got it. That makes sense. And then one last one for me. With coronavirus as well as some large industry consolidation that’s happened, have you seen any changes in inventory and any issues with the supply chain?

Menderes Akdag — President and Chief Executive Officer

We did not have any issues with the supply chain in the June quarter. But as a precaution, we increased our inventory, as I included in my presentation.

Kevin Ellich — Ace Research — Analyst

Okay. That’s great. Thanks, guys.

Menderes Akdag — President and Chief Executive Officer

You’re welcome.

Operator

Thank you. Our last question for today will come from Anthony Lebiedzinski, Sidoti & Company.

Anthony Lebiedzinski — Sidoti & Company — Analyst

Yes. Good morning, guys. So, just one follow-up question. As far as advertising expenses — so just curious, with the Presidential Election coming up, will that have any impact you think as far as your ability to advertise? And if so, maybe talk about your expectations for costs for advertising. Thanks.

Menderes Akdag — President and Chief Executive Officer

We are advertising minimally on television and we will stop advertising on television starting in August. It will probably mostly impact television. It may have some impact on digital. So the prices may be slightly higher, but that’s my input on that.

Anthony Lebiedzinski — Sidoti & Company — Analyst

Okay. Thank you.

Menderes Akdag — President and Chief Executive Officer

You’re welcome.

Operator

At this time, I will turn the call over to Mendo Akdag.

Menderes Akdag — President and Chief Executive Officer

Thank you. In fiscal 2021, we are focusing running [Phonetic] our website and mobile app to optimize our customers’ digital experience. This wraps up today’s conference call. Thank you for joining us. Operator, this ends the conference call.

Operator

[Operator Closing Remarks]