Petmed Express Inc (PETS) Management Discusses Q1 2014 Results - Earnings Call Transcript

| About: PetMed Express, (PETS)

PetMed Express (NASDAQ:PETS)

Q1 2014 Earnings Call

July 22, 2013 8:30 am ET

Executives

Bruce S. Rosenbloom - Chief Financial Officer, Principal Accounting Officer and Treasurer

Menderes Akdag - Chief Executive Officer, President, Director and Member of Investment Committee

Analysts

Bradley D. Maiers - Piper Jaffray Companies, Research Division

Michael A. Kupinski - Noble Financial Group, Inc., Research Division

Ross Taylor - CL King & Associates, Inc., Research Division

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Erin E. Wilson - BofA Merrill Lynch, Research Division

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

Operator

Welcome to the PetMed Express, Inc., doing business as 1-800-PetMeds, conference call to review the financial results for the first fiscal quarter ended on June 30, 2013. 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 nonprescription pet medications and other health products for dogs and cats 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 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. Sir, you may begin.

Bruce S. Rosenbloom

Thank you. I would 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 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, the President and Chief Executive Officer of 1-800-PetMeds. Mendo?

Menderes Akdag

Thank you, Bruce. Welcome, everyone. Thank you for joining us. This morning, we will review the highlights of our financial results. We'll compare our first fiscal quarter ended on June 30, 2013 to last year's quarter ended on June 30, 2012.

For the first fiscal quarter ended on June 30, 2013, our sales were $74.2 million compared to sales of $69 million for the same period the prior year, an increase of 7.6%. The increase was due to increases in new order and reorder sales. Our average order was approximately $77 for the quarter compared to $73 for the same quarter the prior year. The increase was due to a favorable reaction to promotions.

For the first fiscal quarter, net income was $4.8 million or $0.24 diluted per share compared to $4 million or $0.20 diluted per share for the same quarter last year, an increase to earnings per share of 22%.

Reorder sales increased by 7.1% to $59 million for the quarter compared to reorder sales of $55.1 million for the same quarter the prior year.

New order sales increased by 9.6% to $15.2 million for the quarter compared to $13.9 million for the same quarter the prior year. The increase was mainly due to an increase in advertising spending and increase in average order size.

We acquired approximately 207,000 new customers in our first fiscal quarter compared to 197,000 for the same period the prior year. Approximately 79% of our sales were generated on our website for the quarter compared to 77% for the same period the prior year, which resulted in a 10.6% increase in our online sales.

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 seasons, with fall and winter being the off seasons.

For the first fiscal quarter, our gross profit as a percent of sales was flat at 32.4% compared to the same period a year ago. Our general and administrative expenses as a percent of sales was 7.9% for the first fiscal quarter compared to 8.6% for the same quarter the prior year. We leveraged the G&A with increased sales. We spent $10.4 million in advertising for the quarter compared to $9.8 million for the same quarter the prior year, an increase of 5.5%. The advertising cost of acquiring a customer was the same, $50 for the quarter, compared to the same quarter the prior year.

We had $50.5 million in cash and short-term investments and $21.6 million in inventory, with no debt as of June 30, 2013. Net cash from operations for the quarter was $19.8 million.

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

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Kevin Ellich of Piper Jaffray.

Bradley D. Maiers - Piper Jaffray Companies, Research Division

This is actually Brad on for Kevin. I guess my first question, average order size was pretty strong this quarter. Can you provide a little bit more color on the promotions that were driving that strength this quarter?

Menderes Akdag

The consumer purchased additional items at larger quantities. Also, there were some shift to higher-priced items. That was the reason for the increase in the average order volume.

Bradley D. Maiers - Piper Jaffray Companies, Research Division

Okay. And then, in the press release you mentioned you're going to focus on improving your advertising efficiency for the remainder of fiscal year '14. Can you just talk a little bit about what worked well this quarter, maybe what didn't work so well this quarter, and how you plan on improving that efficiency in the rest -- the remainder of the year?

Menderes Akdag

We had a greater exposure on TV in the June quarter. And we paid a little bit more for impression to be able to do that. And our acquisition cost was flat at $50, so we like to improve that a little bit. But with the average order value higher, obviously, we could afford that.

Bradley D. Maiers - Piper Jaffray Companies, Research Division

Okay. And then, you mentioned G&A was lower due to leverage, but I guess, was there anything else you guys did on that cost line to get that number lower?

Menderes Akdag

Our share based compensation decreased by approximately $190,000 comparing the 2 quarters.

Operator

Your next question comes from Michael Kupinski, Noble Financial.

Michael A. Kupinski - Noble Financial Group, Inc., Research Division

Was wondering if you can chat a little bit about, did we get a benefit from the Novartis heartworm medications coming back online in the quarter?

Menderes Akdag

Yes, we did.

Michael A. Kupinski - Noble Financial Group, Inc., Research Division

Can you quantify that impact, Mendo?

Menderes Akdag

I would hesitate to do that, since they have not been available over a year. It's difficult to quantify the net impact.

Michael A. Kupinski - Noble Financial Group, Inc., Research Division

Okay. And can you talk about the current television advertising environment availability for remnant television and pricing? And you talked a little bit about the advertising mix, but what was the advertising like digital, e-mail, Internet versus television in the quarter?

Menderes Akdag

We increased our television exposure in the June quarter, and it's likely going to continue in the near future.

Michael A. Kupinski - Noble Financial Group, Inc., Research Division

And what is the current environment for television advertising? Are you seeing good availability from remnant television and what is the pricing looking like at this point?

Menderes Akdag

Prices usually come down in the summer months, but that's similar to last year.

Michael A. Kupinski - Noble Financial Group, Inc., Research Division

Okay. And then, was flea & tick revenues higher as a percentage of revenues this year than last year?

Menderes Akdag

No.

Michael A. Kupinski - Noble Financial Group, Inc., Research Division

Okay. And then, in terms of Walmart seeming to have a soft launch in getting into the prescription pet medications market, have you seen competitive issues related to the company's launch? And can you talk a little bit about competitive pricing for some of the more popular pet medications, prescription medications?

Menderes Akdag

We are not coming across that so far.

Operator

Your next question comes from Ross Taylor, CL King. [Operator Instructions]

Ross Taylor - CL King & Associates, Inc., Research Division

Two questions. With regards to the average order size, do you anticipate that promotions you did during the quarter may continue over the next few quarters? Do you continue to see this kind of benefit on the average order size? And then, the second question I have just relates to the gross profit margin. It was basically flat year-over-year. Given some of the momentum you had in gross profit the last couple of quarters, I would have thought maybe that could have improved a little bit again this year, but just wondered if some of those promotions held back the gross margin this quarter?

Menderes Akdag

As far as average order value, we're going to attempt to continue to increase it. The gross margins, the reason it didn't improve is we used the gains from some of the shift to generics to discount some of the major brands.

Ross Taylor - CL King & Associates, Inc., Research Division

Okay. And is that something you expect, probably, continues as well?

Menderes Akdag

The market decides that, so if we have to, yes, we will. If we don't have to, we don't have to. So it depends on the market pricing.

Operator

[Operator Instructions] Your next question comes from Anthony Lebiedzinski of Sidoti & Company.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

I was wondering if you could discuss the overall trends that you're seeing in the sales of the prescription medications, generics, over-the-counter? I just hope you could give us a little bit more color as to what you saw in the quarter and your expectation going forward?

Menderes Akdag

Prescription medications were healthy, so we saw a nice growth, and we're anticipating that it's going to continue.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

And as far as generics, I know that, that's something you've had some success with. Could you give us a little bit more color as to your penetration levels there and then, where you see that going forward?

Menderes Akdag

You're asking about prescriptions or the generics...

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Well, generics altogether.

Menderes Akdag

Altogether, there was a nice growth on generics in the June quarter, but we're not going to give specific data points.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

And your comment in your press release about continuing to expand our product offerings, can you give us some color on that topic, please?

Menderes Akdag

We have increased it quite a bit so far, but it's not just pet supplies. Also, we are increasing pet health products.

Operator

Your next question comes from Erin Wilson, Bank of America.

Erin E. Wilson - BofA Merrill Lynch, Research Division

Just real quickly on the supplies business, can you break out, at least anecdotally, how much of that contributed in the quarter? And is that still a key initiative for you?

Menderes Akdag

Pet supplies were actually relatively flat in the June quarter compared to the last year. So it didn't have much of an impact as far as the revenue increase is concerned.

Erin E. Wilson - BofA Merrill Lynch, Research Division

Okay. And what percentage of total sales would that be?

Menderes Akdag

We're not going to disclose that.

Erin E. Wilson - BofA Merrill Lynch, Research Division

Okay. And then, just a broad question, the majority of pet medications are still dispensed through the vet clinic. Do you expect the e-commerce online channel, do you think it's gaining share overall? Where do we expect to see that market share stand or where does it stand currently, and where should it go over the next few years?

Menderes Akdag

It's probably, the online channel is about 12%, 13% of the market, is our guesstimate at this time. It should grow, I would -- our guess is about 1% a year.

Erin E. Wilson - BofA Merrill Lynch, Research Division

Okay. And then, anything you're watching in particular on the regulatory front?

Menderes Akdag

No.

Operator

Your next question comes from Mitch Bartlett, Craig-Hallum.

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

This is George Kelly on for Mitch. Couple of questions. First, the weather has been so kind of odd so far this year and I believe it was a benefit in the quarter. Can you talk about what you expect for the September quarter and how the weather will impact that?

Menderes Akdag

I believe the weather is hot, so that's good news for us. We'll see how the quarter progresses.

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

Okay. And then, as a follow-up to a previous question, the pet health products that you're expanding in, can you talk a little bit more there and give more detail what kind of products and how big is the offering right now?

Menderes Akdag

Similar products that we carried in the past that we are just adding more varieties, and there are new products also coming into the market that we'll start carrying.

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

Okay. And then, lastly, on the regulatory front, you've talked before about the Wag and VetSource, the prescription stuff, is there any update there with their model?

Menderes Akdag

No, I have no additional comments on it.

Operator

I will now turn the meeting back to Mr. Akdag for closing remarks.

Menderes Akdag

Thank you. Going forward, we are focusing on improving advertising efficiency and continuing to expand our product offerings. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call.

Operator

Thank you. Once again, this does conclude today's conference. Thank you for attending. You may disconnect at this time.

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