PetMed Express Inc (PETS) Q3 2020 Earnings Call Transcript

PetMed Express Inc  (NASDAQ: PETS) Q3 2020 earnings call dated Jan. 19, 2021

Corporate Participants:

Bruce Rosenbloom — Chief Financial Officer

Menderes Akdag — President and Chief Executive Officer

Analysts:

Erin Wright — Credit Suisse — Analyst

Anthony Lebiedzinski — Sidoti — Analyst

Ben Rose — Battle Road Research — Analyst

Presentation:

Operator

Welcome to the PetMed Express Inc., doing business as 1-800-PetMeds Conference Call to Review the Financial Results for the Third Fiscal Quarter, for the quarter ended on December 31, 2020. [Operator Instructions] Founded in 1996, 1-800-PetMeds is America’s most trusted 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 product 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 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 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 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 Menderes Akdag, President and Chief Executive Officer of 1800PetMeds. Mendo?

Menderes Akdag — President and Chief Executive Officer

Thank you, Bruce. Good morning. Welcome and thank you for joining us. In the beginning of 2021, we unveiled the brand new logo to commemorate the company’s 25th anniversary. The inspiration for this new logo and brand identity came mostly from consumer feedback. We embrace the opportunity to refresh our brand to best represent pet’s health and wellness on our new website platform.

Now, I’ll review the highlights of our financial results. We will compare our third fiscal quarter ended on December 31, 2020 to last year’s quarter ended on December 31, 2019. For this third fiscal quarter ended on December 31, 2020, our sales were $65.9 million compared to $59.9 million for the same period of the prior year, an increase of 10%. The increase in sales was due to increases in reorder sales. The average order value for the quarter was approximately $88 compared to $85 for the same quarter the prior year.

For the third fiscal quarter, net income was $7.6 million, or $0.38 diluted per share compared to $6.8 million or $0.34 diluted per share for the same quarter of the prior year, an increase to net income of 11%. Reorder sales increased by 12% to $60.2 million for the quarter compared to reorder sales of $53.8 million for the same quarter the prior year. We are encouraged with the continued strong reorders. Our customer retention has increased with the help of our loyalty and [Indecipherable] programs at our new website platform.

New order sales decreased by 7% to $5.7 million for the quarter compared to $6.1 million for the same period, the prior year. However, for the nine months, new orders sales increased by 10%. We acquired approximately 73,000 new customers in our third fiscal quarter, compared to 76,000 for the same period 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 third fiscal quarter, our gross profit as a percentage of sales was 29.8% compared to 29.5% for the same period a year ago, an improvement of approximately 25 basis points.

General and administrative expenses as a percent of sales were 9.8% for the quarter compared to 10.1% for the same quarter the prior year. We were able to leverage the G&A by increased sales. For the quarter, our advertising expenses were relatively flat at $3.2 million compared to the same quarter the prior year.

Advertising cost of acquiring a customer for the quarter was approximately $44 compared to $42 for the same quarter, the prior year. And for the nine months, it was $49 compared to $53 for the nine months, the prior year. We had $106.5 million in cash and cash equivalents and $28.2 million in inventory with no debt as of December 31, 2020. Net cash from operations for the nine months was relatively flat at $21.6 million compared to the nine months last year.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question is from Erin Wright with Credit Suisse. Your line is open.

Erin Wright — Credit Suisse — Analyst

Hey, thanks. Thanks for taking the questions. First, with the new customers that were added during the pandemic, how are you seeing the purchasing behavior or particularly those customers that adopted new pets during the pandemic? How do you anticipate the spending for that cohort will trend for instance in year two and beyond?

Menderes Akdag — President and Chief Executive Officer

It’s growing well. As you have seen our reorder sales increased by 12%, which means that the customers that we added during the pandemic are reordering, which is a good sign.

Erin Wright — Credit Suisse — Analyst

Okay. And as a follow-up to that, the loyalty program, can you speak to some numbers around that in terms of traction or adoption there on and, how that progressing relative to your expectations?

Menderes Akdag — President and Chief Executive Officer

Approximately 20% of the orders had loyalty credits and also [Phonetic] it’s being used to fairly well.

Erin Wright — Credit Suisse — Analyst

Okay. And then one last question. Have you thought or contemplated around services beyond pharmacy, like, Telehealth platforms or other services that you could kind of link or co-market across your platform?

Menderes Akdag — President and Chief Executive Officer

Yes. We are exploring them. We will be focused on the next fiscal year and we will give you more information and the later part of the year.

Erin Wright — Credit Suisse — Analyst

Okay. Great. Thank you so much.

Menderes Akdag — President and Chief Executive Officer

You’re welcome.

Operator

Our next question is from Anthony Lebiedzinski with Sidoti. Your line is open.

Anthony Lebiedzinski — Sidoti — Analyst

Yes. Good morning and thank you for taking the questions. So first, obviously, a very solid reorder sales growth, but new order sales were down. For Mendo, what would you point to us to the primary reasons, why new order sales were down in the quarter?

Menderes Akdag — President and Chief Executive Officer

The market was more promotional during the holidays that negatively impacted the new order sales, but it’s also our off-peak season. So it will be more aggressive with advertising during the peak season when demand is strong.

Anthony Lebiedzinski — Sidoti — Analyst

Got it. Thank you. And then, yeah, so typically in the off-season, there is a sequential improvement in gross margins between 2Q and 3Q. Here, there was a little bit of a step down versus the second quarter, obviously up year-over-year. So just wondering was there a notable change between the shift of the — business between Rx and OTC or maybe was there — just wondering about the margin impact from the loyalty credits. I mean, can you just talk about the gross margin a little bit more?

Menderes Akdag — President and Chief Executive Officer

Sure. Product mix was a little different. And as I said that the market was more promotional during the holidays compared to the September quarter, which to be competitive we attempted to match the market.

Anthony Lebiedzinski — Sidoti — Analyst

Okay. And as far as the loyalty credits, did they have any — to just wondering about the impact of that on the gross margin?

Menderes Akdag — President and Chief Executive Officer

Yeah. There were more — this promotional discounts in the quarter compared to the same quarter last year.

Anthony Lebiedzinski — Sidoti — Analyst

Right, okay. And lastly…

Menderes Akdag — President and Chief Executive Officer

[Indecipherable] loyalty credits.

Anthony Lebiedzinski — Sidoti — Analyst

Got it. [Indecipherable] quantify that, I guess at this point. So lastly, as far as your outlook advertising expenses, as far as new customer acquisition cost, how should we think about that?

Menderes Akdag — President and Chief Executive Officer

We’ll be more aggressive during peak season, when demand is strong, I would anticipate a double-digit growth on advertising expenses.

Anthony Lebiedzinski — Sidoti — Analyst

In the fourth quarter or next — as far as that…

Menderes Akdag — President and Chief Executive Officer

During the spring season, the peak season starts in March. It depends on the weather conditions. We’ll see how — what happens.

Anthony Lebiedzinski — Sidoti — Analyst

All right. Thank you. Best of luck.

Menderes Akdag — President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Our next question is from Ben Rose with Battle Road Research. Your line is open.

Ben Rose — Battle Road Research — Analyst

Yes. Good morning. A few questions. To begin with Mendo, in terms of the rollout of the website enhancements, is that relatively complete at this stage and what is your assessment of the improvement?

Menderes Akdag — President and Chief Executive Officer

It is not complete yet. We anticipate it will be completed by June, but it will be substantially probably completed by end of March, but I would say full completion by June. We did some AB testing, ABCD testing, I should say, comparing the new design with the old design. And we are predicting some sales lift approximately 2% sales lift.

Ben Rose — Battle Road Research — Analyst

Okay. Good to know. There has been much discussion about the impact of the aging pet population, particularly with pet adoptions being up over the last number of months during COVID. Are you seeing any shift in your product mix that would suggest that’s occurring?

Menderes Akdag — President and Chief Executive Officer

Product mix is shifting to prescriptions, but that’s driven by the veterinarians. So the OTC is coming down and prescription is growing. There is some growth in medications beyond maintenance, I should say.

Ben Rose — Battle Road Research — Analyst

Okay.

Menderes Akdag — President and Chief Executive Officer

Chronic illness medications are growing.

Ben Rose — Battle Road Research — Analyst

Okay. You have a couple of customer benefits on your website, that I don’t think are — at least in my opinion that well understood, but one is the ability to offer compound medications. I know you’ve been doing this for quite a while. Do you have a formal outreach plan in place to reach the vets, the veterinarian community to let them know about this?

Menderes Akdag — President and Chief Executive Officer

We are not offering to the veterinarians. We are offering it to our customers. It’s drilled [Phonetic] by a third-party compound pharmacy.

Ben Rose — Battle Road Research — Analyst

Okay. Has it been increasing in popularity over the last several quarters or?

Menderes Akdag — President and Chief Executive Officer

Yes, it is.

Ben Rose — Battle Road Research — Analyst

Okay. And the ask-the-vet feature that you have on your website, have you noticed an increase in the number of customer inquiries in terms of customers wanting to speak directly to a vet about their pet conditions?

Menderes Akdag — President and Chief Executive Officer

Right. On our new website redesign the ask-the-vet is going to be more prominent. So it says, in the old design, it was on prominent. So we anticipate that we’ll see more activity going forward.

Ben Rose — Battle Road Research — Analyst

Okay. And another question is, is there PetMed’s does have a very well established brand, as I understand it as a function of its Net Promoter Score or the Net Promoter Score reflecting that. Have you given any thought to developing branded merchandise for PetMed’s that is to say, non-medication pet oriented merchandise with the PetMed brand?

Menderes Akdag — President and Chief Executive Officer

Yeah. We do have OTC medications under our brand. We did not think about or beyond medications at this time.

Ben Rose — Battle Road Research — Analyst

Okay. And then finally, if I may, in concert with the increase in advertising that you’re anticipating during peak season. Do you think, we’ll see a pick up. I guess two questions. One is, what we see a pickup in TV advertising? And then secondly, will there be kind of a renewed emphasis on the brand, either by way of a new brand campaign?

Menderes Akdag — President and Chief Executive Officer

Yeah. You will see some more activity until [Indecipherable] advertising will likely double our budget from last year on television.

Ben Rose — Battle Road Research — Analyst

Okay. And then as far as any kind of thoughts to new branding or enhanced branding generally speaking?

Menderes Akdag — President and Chief Executive Officer

Yeah. Obviously, we’ll use our new refresh brand in our advertising.

Ben Rose — Battle Road Research — Analyst

Okay. Thank you very much.

Menderes Akdag — President and Chief Executive Officer

You’re welcome.

Operator

And at this time, I’m showing no further questions. I’ll turn it back to you, sir.

Menderes Akdag — President and Chief Executive Officer

Thank you. The next fiscal year, we’ll be exploring alternative ways where we acquire customers and adding value-added services. We will continue investing in our e-commerce platform and mobile app to better service our customers. This wraps up today’s conference call. Thank you for joining us. Operator, this ends the conference call. Thank you.

Operator

[Operator Closing Remarks]