PetMed Express' (PETS) CEO Menderes Akdag on Q1 2016 Results - Earnings Call Transcript

| About: PetMed Express, (PETS)

PetMed Express, Inc. (NASDAQ:PETS)

Q1 2016 Earnings Conference Call

July 25, 2016 08:30 AM ET

Executives

Menderes Akdag - President and CEO

Bruce Rosenbloom - CFO

Analysts

Erin Wilson - Credit Suisse

Anthony Lebiedzinski - Sidoti & Company

Mitch Bartlett - Craig Hallum

Michael Kupinski - Noble Financial

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 that ended on June 30, 2016. 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 television, online, direct mail, and print advertising campaigns, which directs 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’d like to turn the call over to the Company’s Chief Financial Officer, Mr. Bruce Rosenbloom. Sir, you may begin.

Bruce Rosenbloom

Thank you. I’d like to welcome everybody here today. Before I turn the call over to Menderes 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, the President and Chief Executive Officer of 1-800-PetMeds. Mendo?

Menderes Akdag

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 first fiscal quarter ended on June 30, 2016 to last year’s quarter ended on June 30, 2015. For the first fiscal quarter ended on June 30, 2016 sales were $72.5 million compared to sales of $71.6 million for the same period the prior year, an increase of 1.2%. The increase was due to increases in new order sales. Our average order value was approximately the same $82 for the quarter compared to the same quarter last year. For the first fiscal quarter, net income was $6.6 million or $0.32 diluted per share compared to $5.8 million or $0.29 diluted per share for the same quarter last year, an increase to net income of 15%. New order sales increased by 10% to $13.3 million for the quarter compared to $12.1 million for the same quarter the prior year. Reorder sales were slightly down to $59.2 million for the quarter compared to reorder sales of $59.6 million for the same quarter last year.

We acquired approximately 158,000 new customers in our first fiscal quarter compared to 148,000 for the same period the prior year. Approximately 82% of our sales were generated on our website for the quarter compared to 81% for the same period last year. The seasonality in our business is due to the proportional 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 first fiscal quarter, our gross profit as a percent of sales was 31% compared to 32.1% for the same period a year ago. The decrease was due to increases in product cost on short-term brands and additional discounts given to customers to increase sales. Our general and administrative expenses as a percent of sales was slightly up to 8.4% compared to 8.1% for the same period last year. We spent $5.8 million in advertising for the quarter compared to $7.9 million for the same quarter the prior year, a decrease of about 27%. The advertising costs of acquiring a customer was approximately $37 compared to $53 for the same quarter the prior year. We were much more efficient compared to last year. We had $44.3 million in cash and cash equivalents and $27 million in inventory with no debt as of June 30, 2016. Net cash from operations for the quarter was $13.1 million compared to $10.8 million for the same period last year.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Erin Wilson from Credit Suisse. Your line is open.

Erin Wilson

What sort of visibility do you have on the advertising spending on a quarterly basis, is this some sort of run rate that you expect going forward, do you think that the new strategies are working for you, how much lower can advertising spending go from here?

Menderes Akdag

Our estimate is about is going to be about 8% for the fiscal year. We discontinued some advertising that was not cost-effective.

Erin Wilson

Can you speak a little bit to your new strategies now, I guess what did you eliminate specifically from that advertising strategy that you mentioned and what is the focus now from a strategy standpoint?

Menderes Akdag

Mainly we eliminated television advertising and we switched some dollars to online and print.

Erin Wilson

Okay, great. And the gross profit trend, I guess what’s the primary factors driving that I guess it’s promotional activity, but what were you doing this year, this quarter that you weren't doing last year? And should that sort of trend reverse in the coming quarters?

Menderes Akdag

Just more aggressive pricing.

Erin Wilson

And how should we anticipate the quarterly progression of the gross margin trend?

Menderes Akdag

We’re anticipating continuing pressure on the major brand margins, but we may be able to make some over up on the advertising line.

Erin Wilson

Okay. Thank you.

Menderes Akdag

You’re welcome.

Operator

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

Anthony Lebiedzinski

Yes. Good morning. Thank you for taking the question. So, Mendo, just a follow-up as far as the advertising commentary, 8% of sales is I think what you expect. So, I assume that your - the quarterly variations will be there, I guess, in the off season, you probably will be able to spend more effectively, is that the right way to think about it.

Menderes Akdag

Yes. The quarterly variations will continue. The 8% number I gave you was for the fiscal year.

Anthony Lebiedzinski

Got it. Okay. And as far as the gross margins, you talked about increased discounting on your - on the branded products, can you give us a sense as to how some of your private labels are doing or generics, any sort of color in regards to those products would be helpful?

Menderes Akdag

On generics, the gross margins are much higher than for the brands, if that’s what you’re asking.

Anthony Lebiedzinski

Well, yeah, I do realize that, like, can you talk about like what the sales trends you’re seeing in those items?

Menderes Akdag

Actually, generic sales were down for the quarter compared to last year.

Anthony Lebiedzinski

Okay. And any particular reason why you think that that was the case?

Menderes Akdag

Well, topical brand sales were down too short. It’s sort of following that trend.

Anthony Lebiedzinski

Got it. Okay. And lastly, can you discuss the impact of weather if anything had on your business, I think the March quarter, you guys talked about some pull forward of demand because of the weather, so if you could just address that, that would be great?

Menderes Akdag

We had unusually strong; especially reorder sales and new order sales in the March quarter, which might have taken away some sales from the June quarter.

Anthony Lebiedzinski

Okay. All right. Thank you very much.

Menderes Akdag

You’re welcome.

Operator

Thank you. [Operator Instructions] Our next question is from Mitch Bartlett from Craig Hallum. Your line is open.

Mitch Bartlett

Good morning. So another very impressive quarter on advertising.

Menderes Akdag

Thank you.

Mitch Bartlett

Say in response to the previous question that you eliminated all TV based advertising or just it continued to reduce it?

Menderes Akdag

Eliminated, yes. That’s what I said.

Mitch Bartlett

Well, so your kind of the poster trial for the efficiency of online versus TV, just very impressive. And so your competitors haven’t duplicated these channels or your specific approach or are other competitors starting to mimic your advertising strategies or anything you can talk about on that?

Menderes Akdag

They have been, so they have been for a while now. So, I wouldn’t say they didn’t, except television.

Mitch Bartlett

Okay. And do you see the trend longer-term; I know you’ve kind of answered this already, but longer trend continuing to maybe give more on price as an alternative to advertising. So over a 3, 5 year period, could we see more gross margin erosion and better efficiency on the advertising line, like you’ve seen over the last few years?

Menderes Akdag

Probably yes. The market is more competitive. So we have - price wise, we have to be competitive. And with our more aggressive pricing had a positive impact on our - especially on our new order sales.

Mitch Bartlett

Very good. Thank you.

Menderes Akdag

You’re welcome.

Operator

Thank you. Our next question is from Erin Wilson from Credit Suisse. Your line is open.

Erin Wilson

Hi, can you speak to potential kind of relationships with companies such as VetSource; is that helping or potentially hurting you from a competitive standpoint?

Menderes Akdag

We’re not coming across them. So, our guess is that is not impacting us either way.

Erin Wilson

And can you speak to the dynamics across the [indiscernible] with the proliferation of new prescription only medications event in the topicals were down, I guess, as expected, but anything else you could comment about the underlying health of that industry for you?

Menderes Akdag

There are new products, there are new pills coming into the market and the pills section is growing.

Erin Wilson

Do you have access to those?

Menderes Akdag

Yes. We do.

Erin Wilson

Okay. All right. Thank you.

Menderes Akdag

You’re welcome.

Operator

Thank you. Our next question is from Michael Kupinski from Noble Financial. Your line is open.

Michael Kupinski

Thanks for taking the question. Going back to the question about advertising, many companies have used more of an omni approach to their advertising and in the case of television, tends to kind of keep the brand awareness out there, I was wondering if by eliminating television, have you determined that you would not go back to television or do you think that at some point, you could kind of reemerge a program at least to keep some advertising on television?

Menderes Akdag

At some point, we may go back. We’re going to follow the data, so we may test some and see what kind of results we hit and continue accordingly.

Michael Kupinski

Okay. That’s all I had. Thank you.

Menderes Akdag

You’re welcome.

Operator

Thank you. Our next question is from Mitch Bartlett from Craig Hallum. Your line is open.

Mitch Bartlett

Yes. Sorry. I forgot to ask the most important follow-on on the advertising efficiency, so if it is so efficient, why not spend more, why not double down, what is the size of these channels that you can access, are they enough to put considerable resources?

Menderes Akdag

Well, we are maximizing the most cost effective advertising. So we’re already doing that.

Mitch Bartlett

If you were to increase your advertising by 30%, 40%, would they cause the customer acquisition spike pretty dramatically?

Menderes Akdag

Most likely yes.

Mitch Bartlett

Thank you very much.

Menderes Akdag

You’re welcome.

Operator

That’s our last question. I would like to turn the call over back to Mr. Mendo Akdag.

Menderes Akdag

Thank you. We’re currently preparing to move into our new corporate headquarters and distribution center, which is expected to occur in our third fiscal quarter. This wraps up today’s conference call. Thank you for joining us. Operator, this ends the conference call.

Operator

Thank you. That concludes today’s conference. Thank you for participating. You may now disconnect.

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