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PetMed Express, Inc. (NASDAQ:PETS)

F2Q 2012 Earnings Call

October 22, 2012 08:30 am ET

Executives

Menderes Akdag – President & Chief Executive Officer

Bruce Rosenbloom – Chief Financial Officer

Analysts

Kevin Ellich – Piper Jaffray

Erin Wilson – Bank of America-Merrill Lynch

Michael Kupinski – Noble Financial

Anthony Lebiedzinski – Sidoti & Company

Mitch Bartlett – Craig-Hallum

Ross Taylor – CL King

Operator

Welcome to the PetMed Express, Inc. DBA 1-800-PetMeds conference call to review the financial results for F2Q and six months ended on September 30, 2012. 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 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 this 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. Menderes?

Menderes Akdag

Thank you, Bruce. Welcome, everybody, thank you for joining us. Today we will review the highlights of our financial results. We’ll compare our F2Q and six months ended on September 30, 2012, to last year’s quarter and six months ended on September 30, 2011.

For F2Q ended on September 30, 2012, sales were relatively flat at $58.1 million compared to sales of $58.2 million for the same period the prior year. For the six months ended on September 30, 2012, sales were $127.1 million compared to $131.8 million for the six months in the prior year, a decrease of 3.6%.

The sales stabilized for the quarter even though the average order value was about 5% lower at $72 compared to $76 for the same quarter in the prior year. The decrease in average order value was due to additional discounts given and a change in product mix to lower-priced items, mainly generics. Also, the unavailability of Novartis brands continued to negatively impact our sales.

For F2Q, net income was $4 million or $0.20 diluted per share, compared to $3.9 million or $0.19 diluted per share for the same quarter in the prior year, an increase to earnings per share of 6%. For the six months, net income was $8 million or $0.40 diluted per share compared to $8.8 million or $0.41 diluted per share a year ago, a decrease to earnings per share of 4%. The increase for the quarter was due to a decrease in operating expenses and the decrease for the six months was mainly due to lower sales in the June quarter.

Reorder sales increased by 2.1% to $46.4 million for the quarter compared to reorder sales of $45.5 million for the same quarter the prior year. For the six months, the reorder sales slightly decreased to $101.5 million compared to $102.1 million for the same period last year.

New sales decreased by 8.1% to $11.7 million for the quarter compared to $12.7 million for the same period last year. For the six months, the new order sales decreased by 13.8% to $25.6 million compared to $29.7 million for the same period last year. The decreases were mainly due to a reduction in advertising and decreases in average order value.

We acquired approximately 177,000 new customers in our F2Q compared to 184,000 for the same period the prior year; and we acquired approximately 374,000 new customers in the six months compared to 410,000 for the same period a year ago. Approximately 77% of our sales were generated on our website for the quarter compared to 74% for the same period the prior year, which resulted in a 2.9% increase to our online sales for the quarter compared to the same quarter last year. The seasonality in our businesses 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 F2Q, our gross profit as a percent of sales was 33.3% compared to 34.2% for the same period the prior year; and for the six months, our gross profit as a percent of sales was 32.8% compared to 33.4% for the same period a year ago. The percentage decreases can be attributed to increases in freight costs to improve service levels. Our general and administrative expenses as a percent of sales improved to 9.2% for the quarter, compared to 9.6% for the same period a year ago; and for the six months it was 8.9% which was the same as the six months the prior year.

For the quarter, we spent $7.4 million in advertising compared to $7.9 million for the same quarter the prior year. The reduction in advertising for the quarter was due to the unavailability of TV remnant space inventory. For the six months we spent $17.3 million in advertising compared to $18 million during the same period a year ago. The advertising costs of acquiring a customer improved to $42 throughout the quarter compared to $43 for the same quarter the prior year. For the six months it was $46 compared to $44 for the same period a year ago.

We had $47 million in cash and cash equivalents, $15.4 million in short-term investments and $19.6 million in inventory with no debt as of September 30, 2012. Net cash from operations for the six months was $15.7 million. Capital expenditures for the six months were approximately $290,000. In accordance with our share repurchase program, we repurchased approximately 397,000 shares, paying approximately $3.9 million during the quarter at an average price of $9.74.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions.) And we do have a question coming in from Kevin Ellich, Piper Jaffray. Your line is open.

Kevin Ellich – Piper Jaffray

Good morning, guys, just a couple questions. I guess first of all, Menderes – good morning. You mentioned the unavailability of TV advertising remnant space this quarter. Are you still seeing that impact or have things started to open up?

Menderes Akdag

We’re still seeing the impact and we expect to see it until November 6th.

Kevin Ellich – Piper Jaffray

So it’s really due to the election. So is it safe to assume that we should be looking at advertising expenditures being lower on a year-over-year basis, similar to what we saw this quarter?

Menderes Akdag

Probably, yes.

Kevin Ellich – Piper Jaffray

Okay. And then you also mentioned the discounts that impacted this quarter. Are you still offering any discount programs?

Menderes Akdag

Yes we are, but right now it’s similar to what we did last year.

Kevin Ellich – Piper Jaffray

Got it. And then do you have any update or thought on when Novartis might be back online? We’ve heard maybe by the end of the year but it seems like there’s some conflicting information out there.

Menderes Akdag

The latest information we have is the beginning of 2013.

Kevin Ellich – Piper Jaffray

Beginning of 2013, okay, got it. And then last question here: it looks like, Bruce, maybe on the cash flow statement we saw some investments. I’m just wondering if there’s anything you can talk about on that front?

Bruce Rosenbloom

We did invest additional cash into some short-term investments. We’ve held those short-term investments for a few years now and we just upped our balance from about $10 million to about $15 million.

Kevin Ellich – Piper Jaffray

Got it, okay. And then can you remind us where the buyback authorization is? Is it around $10 million now?

Menderes Akdag

About $10 million remaining, yes.

Kevin Ellich – Piper Jaffray

Okay, got it. Thanks guys!

Operator

Thank you. The next question comes from Erin Wilson, Bank of America-Merrill Lynch. Your line is open.

Erin Wilson – Bank of America-Merrill Lynch

Can you give us an update on the supplies and accessories business and how that’s progressing?

Menderes Akdag

It’s increasing but we’re not going to get into the specifics.

Erin Wilson – Bank of America-Merrill Lynch

Okay. And then I guess I understand it’s been an inherently lower-margin business but I mean are there ways to improve the profitability for that segment and are you still considering switching from your third-party fulfillment strategy?

Menderes Akdag

We are still using third-party fulfillment. As far as profitability is concerned, that depends on the product mix and we will only really carry it if it adds value and increases loyalty to our customer base.

Erin Wilson – Bank of America-Merrill Lynch

Okay. And then I’m curious what your thoughts were on the FTC discussion a few weeks ago. Do you expect a follow-up to that with some sort of broader investigation or legislation?

Menderes Akdag

We are not going to speculate on what the FTC may or may not do. If and when they take any action we can talk about it.

Erin Wilson – Bank of America-Merrill Lynch

Okay, thanks.

Operator

Thank you. The next question comes from Michael Kupinski, Noble Financial. Your line is open.

Michael Kupinski – Noble Financial

Thanks for taking the question. On the pet accessories, are you still planning on carrying an inventory of pet accessories at this point? I just wanted to follow up on that one question there.

Menderes Akdag

We are currently using [third] product fulfillment. If that changes we’ll let you know.

Michael Kupinski – Noble Financial

Okay. And did you notice any difference in the competitive landscape in the quarter, particularly for flea & tick?

Menderes Akdag

No, it was similar to last year.

Michael Kupinski – Noble Financial

Okay. And could you identify the revenue impact from the Novartis plant closings in the quarter? What would you say was the revenue impact?

Menderes Akdag

Our rough estimate is about $2 million.

Michael Kupinski – Noble Financial

Okay. And then just some housekeeping items: the depreciation and amortization was a little lower – is that a good run rate going forward or was there any particular reason for that to be down in the quarter, for my (inaudible) at least.

Menderes Akdag

Right. There’s been a reduction in capital expenditures and that’s the reason it has been down. It depends on if we make any major capital expenditures (inaudible) but at this time we are not planning on it; but if we do we’ll let you know.

Michael Kupinski – Noble Financial

And if you can just remind me if you would, is the prospect for capital expenditures, is that for updating the warehouse that you have in Pompano or what would be the reason that you have an increase in CAPEX?

Menderes Akdag

The distribution center is one possibility. The other possibility is a change in our systems and so forth.

Michael Kupinski – Noble Financial

Okay, alright. Thank you, that’s all I have.

Operator

Thank you. The next question comes from Anthony Lebiedzinski with Sidoti & Company. Your line is open.

Anthony Lebiedzinski – Sidoti & Company

Good morning, a couple of questions. So first, are you still seeing more customers ordering the three packs versus six packs for example of flea & tick products? I know you mentioned this on your previous calls.

Menderes Akdag

It was, in the previous quarter it was similar to the same quarter last year.

Anthony Lebiedzinski – Sidoti & Company

Okay. And your G&A costs were down a little bit more so than we expected. I know there was some seasonality in the expenses; I was just wondering if perhaps you cut back on certain incentives, compensation expenses or anything else we should think about.

Menderes Akdag

It was credit card processing fees, professional fees and a slight decrease in payroll were the three that [caused] that cost reduction.

Anthony Lebiedzinski – Sidoti & Company

Okay. Alright, thank you very much.

Operator

Thank you. (Operator instructions.) Our next question comes from Mitch Bartlett, Craig-Hallum Company. Your line is open; you may ask your question.

Mitch Bartlett – Craig-Hallum

Thank you. I’m just wondering if you can characterize kind of the pharmacy and the non-prescription side of the business. What are the trends on those two sides of the business broadly?

Menderes Akdag

Actually in the September quarter the OTC went up and Rx went down slightly, but the main reason is the unavailability of the Novartis brands.

Mitch Bartlett – Craig-Hallum

And the strength in the OTC, is that new created? What are you doing to see that kind of response after a couple of years where it’s been a little rocky?

Menderes Akdag

Generics and being more aggressive, offering more discounts.

Mitch Bartlett – Craig-Hallum

And the generics, what do you think that contributed to the decline in the AOB? How did that look?

Menderes Akdag

We’re not going to comment on that.

Mitch Bartlett – Craig-Hallum

Okay. Thank you.

Operator

And your next question comes from Ross Taylor, CL King. Your line is open; you may ask your question.

Ross Taylor – CL King

Yeah, my first question just has to do with some of your generic offerings or your initiatives on that side. I mean the generic products and specifically the [Flea 4X], have they progressed as you’ve expected in the percent of your sales mix?

Menderes Akdag

Yes. We are cautiously optimistic with it but other than that we’re not going to get into any specific data points.

Ross Taylor – CL King

Okay, my second question: your customer acquisition costs were down a little bit year-over-year and certainly down a lot from what you had in the June quarter. If you are able to significantly increase your TV advertising once you get past the election, is that likely to boost your customer acquisition costs materially or how much you manage that?

Menderes Akdag

We were more efficient in the September quarter compared to the June quarter. In the June quarter we [forced it] and that’s never a good idea. And we stuck to the fundamentals in the September quarter and took what was there, and we intend to continue to do that.

Ross Taylor – CL King

Okay. And my final question is, I’m just trying to get a sense of how the mild winter maybe has affected the flea & tick business over the first nine months of this year. I just wondered if you had any sense in the September quarter of the mix of flea & tick sales and if with the adjustment of Novartis it was where it might normally be, and whether you did see any evidence that maybe a lot of business was pulled forward into the March quarter from June?

Menderes Akdag

That is correct. It was stronger, the flea business was stronger in the September quarter; and as you know the March quarter was strong and the June quarter was weak. Probably there was some revenue shift from June to March.

Ross Taylor – CL King

Okay, that’s helpful. Thanks very much.

Operator

And now I’d like to turn the call back over to Menderes Akdag. Sir, you may begin.

Menderes Akdag

Thank you. Going forward we are focusing on advertising efficiency and shifting sales to higher-margin items, while 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. That does conclude today’s conference call. You may disconnect at this time.

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