PetMed Express, Inc. (PETS) Q3 2013 Earnings Report, Transcript and Summary

Welcome to the PetMed Express, Inc. doing business as 1-800-PetMeds conference call to review the financial results for the third fiscal quarter and 9 months ended on December 31, 2012. 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 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.

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

Thank you, Bruce. Welcome, everyone. Thank you for joining us. Today, we will review the highlights of our financial results. We'll compare our third fiscal quarter and 9 months ended on December 31, 2012, to last year's quarter and 9 months ended on December 31, 2011. For the third fiscal quarter ended on December 31, 2012, sales were $49.6 million compared to sales of $50.5 million for the same period the prior year, a decrease of 1.8%. For the 9 months ended on December 31, 2012, sales were $176.7 million compared to sales of $182.3 million for the 9 months of the prior year, a decrease of 3.1%. The decreases were due to decreases in new order sales. Also, average order value for the quarter was down to $71 compared to $73 for the same quarter of the prior year, mainly due to changing product mix and lower-priced items, including generics. The unavailability of Novartis brands continued to negatively impact our sales. For the third fiscal quarter, net income was $4.6 million or $0.23 diluted per share compared to $3.9 million or $0.19 diluted per share for the same quarter of the prior year, an increase to earnings per share of 19%. For the 9 months, net income was $12.6 million or $0.63 diluted per share compared to $12.7 million or $0.61 diluted per share a year ago, an increase to earnings per share of 3.2%. The increase for the quarter was mainly due to decrease in operating expenses. Reorder sales increased by 1.2% to $40.9 million for the quarter compared to reorder sales of $40.5 million for the same quarter of the prior year. For the 9 months, reorder sales were relatively flat at $142.4 million compared to $142.5 million for the same period a year ago. Reorder sales decreased by 13.8% to $8.7 million for the quarter compared to $10.1 million for the same period the prior year. For the 9 months, the new order sales also decreased by 13.8% to $34.3 million compared to $39.8 million for the same period last year. The decreases were due to reduction in advertising spending and decrease in average order value. We acquired approximately 131,000 new customers in our third fiscal quarter compared to 150,000 for the same period the prior year, and we acquired approximately 504,000 new customers in the 9 months compared to 560,000 for the same period a year ago. For the quarter, approximately 78% of our sales were generated on our website compared to 77% for the same quarter last 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 seasons with fall and winter being the off seasons. For the third fiscal quarter, our gross profit, as a percent of sales, was 34.7% compared to 34% for the same period a year ago. For the 9 months, our gross profit as a percent of sales was 33.3% compared to 33.6% for the 9 months a year ago. The percentage increase for the quarter can be mainly attributed to change in product mix to higher-margin items, including generics. Our general and administrative expenses, as a percent of sales, were 10.4% for the quarter and 9.3% for the 9 months, which were the same as the 3 months and the 9 months of the prior year. For the quarter, we spent $4.6 million in advertising compared to $5.4 million for the same quarter of the prior year, a decrease of about 16%. TV advertising spending -- I'm sorry, TV advertising space was crowded during the quarter due to the elections and the holiday season. For the 9 months, we spent $21.9 million for advertising compared to $23.5 million for the same period a year ago, a decrease of about 7%. Advertising cost of acquiring a customer for the quarter improved to $35 compared to $36 for the same quarter of the prior year. And for the 9 months, it was $43 compared to $42 for the same period a year ago. We had $30 million in cash and cash equivalents, $15.5 million in short-term investments and $18.7 million in inventory with no debt as of December 31, 2012. Net cash from operations for the 9 months increased to $21.8 million compared to $13.7 million for the 9 months of the prior year, mainly due to reduction in inventory. We paid $1 per share special dividend during the quarter in addition to the regular dividend. This ends the financial review. Operator, we are ready to take questions.

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

This is Brad Maiers in for Kevin, actually. Just wanted to ask quickly about Novartis. I think last time we spoke to you, you thought it might be back on beginning in 2013. Is that back on now, or do you have any new expectations there?

It's still not back on. The latest date that we have got is August of 2013 with a caveat that, obviously, the information we got before and passed to you has not been accurate.

Great. And then in regards to advertising, now that the election has passed, do you think we could see that advertising spend increase in the fiscal fourth quarter, or is this kind of a good run rate going forward?

I would say it's still off-peak season for us, so it will probably be similar to what we spent last year's fourth quarter. But for the next fiscal year, we intend to increase the advertising.

Okay. And then any discounting that you guys did this quarter?

We did. Not -- slightly more than last year, but not as much as the last -- the prior 6 months.

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

Could you maybe discuss generics and the impact that they're having in the mix, especially in flea & tick?

Generics are helping improve the margins. They have higher margins and also they are impacting the -- negatively impacting the sales because they are lower priced. As far as the specific data points, we're not going to comment on that.

People are moving to generics. It's a good mix shift.

There is a shift, yes.

Great. And on the advertising, going forward, well, maybe you answered this and I missed it. But the shift away from TV over the last little while, is that going to be continued? Are you going to go more online with your advertising?

Historically, our marketing approach has been multichannel: TV, online and print. And the channels that complement each other and it's difficult to shift dollars in a cost-effective manner. We attempted that earlier in the year, but it was not as successful. So we would anticipate similar mix, but online has been growing in the last year or 2.

Just remind us, you hit a threshold of ROI and you cut it off no matter what. Is that, perhaps, what the philosophy is?

We do have a threshold, yes.

And in the Q3 report, with the advertising down 16%, it was just cost prohibitive to be advertising on TV and so you just stopped. You stopped the...

Well, the TV advertising space was crowded during the quarter due to the elections and the holiday season, so there were much less remnant space availability.

And since the election, what does that look like to you? Does it come back -- a lot more inventory back into your threshold?

Right after the election, the general advertisers entered the market for the holiday season. So even after that, it was tight for November and December.

Your next question comes from Anthony Lebiedzinski of Sidoti & Company.

Other than the higher amount of generics, was there anything else in terms of the product mix that changed?

There is some change in the product mix due to the unavailability of Novartis brands.

But nothing else besides that, right?

That is correct, yes.

Okay. And was there any notable difference between the average order value for new orders versus reorders?

New order average order value for the quarter was $69, and the reorder average order value was $72 for the quarter.

And how does that compare to a year ago?

The year ago, the new order average order value was $71 and the reorder was $74 for the prior year, same period.

[Operator Instructions] At this time, I will turn it back to you for closing remarks.

Thank you. Going forward, we are focusing on advertising efficiency to improve new order sales 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.

Thank you. Once again, thank you for attending. You may disconnect at this time. Today's conference call has concluded. Again, thank you for attending.