Welcome to the PetMed Express, Inc. doing business as 100- (sic) [1-800] PetMeds conference call to review the financial results for the first fiscal quarter ended on June 31 of 2014. At the request of the company, this conference call is being recorded. Founded in 1996, 100- (sic) [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. 100- (sic) [1-800] PetMeds markets its products through national television, online, direct mail and print advertising campaigns, which directs consumer to order by phone or on the Internet and aim to increase the recognition of the PetMeds family of brand names. 100- (sic) [1-800] PetMeds provides an 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.

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 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 first fiscal quarter ended on June 30, 2014, to last year's quarter ended on June 30, 2013. For the first fiscal quarter ended on June 30, 2014, sales were $72.5 million compared to sales of $74.2 million for the same period the prior year, a decrease of 2.2%. The decrease was due to decreases in new order and reorder sales. The demand was soft for flea & tick topicals compared to last year. Our average order was approximately $78 for the quarter compared to $77 for the same quarter the prior year. For the first fiscal quarter, net income was $5 million or $0.25 diluted per share compared to $4.8 million or $0.24 diluted per share for the same quarter last year, an increase to net income of 4.6%. Reorder sales decreased slightly to $58.5 million for the quarter compared to reorder sales of $59 million for the same quarter the prior year. New order sales decreased by 7.7% to $14.1 million for the quarter compared to $15.2 million for the same quarter the prior year. The decrease was mainly due to an increase in customer acquisition costs and reduction in advertising. We acquired approximately 184,000 new customers in our first fiscal quarter compared to 207,000 for the same period the prior year. Approximately 80% of our sales were generated on our website for the quarter compared to 79% 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 seasons, with fall and winter being the off seasons. For the first fiscal quarter, our gross profit as a percent of sales was 32.8% compared to 32.4% for the same period a year ago. The increase was due to a reduction of product cost on certain brands. Our general and administrative expenses were flat compared to last year. We spent $9.9 million in advertising for the quarter compared to $10.4 million for the same quarter the prior year, a decrease of 4.8%. The advertising cost of acquiring a customer was approximately $54 compared to $50 for the same quarter the prior year. The increase was due to advertising cost increases. We had $44.7 million in cash and short-term investments and $32.9 million in inventory, with no debt as of June 30, 2014. Net cash from operations for the quarter was $14.3 million. This ends the financial review. Operator, we are ready to take questions.

[Operator Instructions] Our first question is from Kevin Ellich from Piper Jaffray.

Mendo, I've got a few questions here. So let's just start off. You said there was soft demand for topicals. I guess, any idea what was driving that? Because I think seasonality was a little bit later, so we -- shouldn't we have seen kind of a strong flea & tick season this quarter? Was that surprising to you?

The season started late so the demand was weak for the flea & tick topicals compared to last year for the June quarter.

Okay. Do you -- did you guys get any inventory for the chewable flea & tick? And so...

Yes.

If so, how was demand for those products?

Those are increasing.

Okay, got you. That's helpful. And then advertising cost increased, you said. Was that for TV and Internet? And I guess, what's your outlook for the year -- or for the remainder of the year?

We paid more per impression both on the Internet and on TV. Our outlook is, overall, we are anticipating the cost per impression to go up mid- to high-single digit.

Mid to high, got you. That's helpful.

Compared to last year.

Year-over-year, got you. Okay. And then you also made a comment about, in the press release, for the remainder of the year, focusing on improving marketing efforts. I guess, could you talk about what you're doing to improve the marketing efforts to drive more -- higher sales?

We are putting more emphasis on database marketing, move from maybe mass marketing towards more database marketing, one-to-one marketing.

Okay, that's helpful. And then you also talked about cost reduction in certain brands helped boost your gross profit this quarter. I guess, could you -- any specific brands you want to call out or any specific categories where you saw those lower costs?

I'm not going to comment on that.

And the next question is from Erin Wilson, Bank of America Merrill Lynch.

Just the first one as a follow-up to the last question. Kind of the lower cost for certain branded products, is that sort of trend sustainable going forward? Or how should we think about that dynamic as it relates to the gross margin?

We hope so. We're going to try it.

Okay. And was it meaningful at all as far as, like, a material contributor?

It was 40 basis points so the numbers speak for themselves. So the gross profit margins improved by 40 basis points.

Okay, great. And then in the parasiticide space, generally speaking, are you seeing more customers purchasing the 3-month packs versus the 6-month packs compared to last year's experience? Just trying to figure out the dynamics there as well.

It was fairly similar. There was no material difference between this June quarter compared to last year.

Okay. And where do you think the market stands overall as far as the e-commerce online channel? Do you think it's gaining share in this pet specialty arena? And where do you expect that to go over the next few years?

The brick-and-mortar is gaining more market share on the over-the-counter medications, especially flea & tick topicals, it appears like. I would say online is still gaining some market share. We expect that to continue for the next couple of years.

The next question is from Anthony Lebiedzinski of Sidoti & Company.

Could you comment or give at least some color as far as how your prescription medication business did versus your -- I know as far as the over-the-counter, you've mentioned flea & tick. But if you could just give us some color as far as how those product segments did, that'd be great.

Directionally, prescription business is up compared to last June.

Okay. So does that explain perhaps to a certain extent why your gross margin was up? Because, usually, your prescription medications do have a better gross margin than OTC.

That is correct, yes.

Okay, got it. Okay. Then also, as far as the steps that you're taking to improve your marketing efforts, is it just focusing more on database marketing? Or is there anything else that we should think about as to how you're going to try to get increased sales?

More emphasis on database marketing, I would say, would be the primary that -- we want to improve that area.

And the next question is from Michael Kupinski of Noble Financial.

I'm just wondering if you need to advertise more on television to keep your brands relevant. In other words, you seem to be determining your advertising spend based on revenue contribution. But is there a point when the company might need to advertise more aggressively to just maintain the brand itself?

It depends on -- the data is showing that it was cost prohibitive to spend more so that's why we did not. So you have to look at the lifetime value of the customer versus what the acquisition cost is coming at. And incrementally, it's higher than the average, $54, so it was cost prohibitive to spend more in the June quarter. It doesn't mean it will not be beneficial some time in the future, so it depends on where the numbers are coming at.

Okay. And can you talk a little bit more about the competitive landscape for flea & tick? Do you need to lower your prices on flea & tick topicals to maintain market share? What is your strategy regarding the topical side of the business?

We do survey the prices in the market. We believe we price ourselves competitively, so we are competitive already.

I guess the question would be that PetMed has always been viewed as being a low-cost provider or the cheaper alternative, so to speak. What -- it seems like your -- the flea & tick topical is not always the cheapest online. What are your thoughts about how you -- obviously, the competitive landscape has increased. What are your viewpoints about how to kind of tackle that market so that we can see a reversal and see growth in that business?

Well, I mean, we may be slightly more aggressive pricewise going forward to at least keep the market share on the topical.

And the previous question about chewables. I guess, in terms of -- just kind of a follow-up on there. Just in terms of chewables in terms of the market share right now, where do you anticipate the chewables in terms of flea & tick? What type of market share do they have at this point?

I don't have that data at this time, but you have to take into account that it's new. So it's going to take a little time for it to grow.

And in your viewpoint there, do you have a better competitive advantage? Or do you -- in terms of pricing, structure or anything like that, what -- how do you view the barrier to entry for chewables for you versus the competition?

It's a prescription item so there's a barrier to entry, so we like it. So yes, we do have a competitive advantage there.

And in terms of your accessory business in the quarter, was there anything notable in the quarter at that portion of the business?

No. It was fairly flat, actually.

Okay. And any thoughts about new products or anything like that at this point? Or is it just a status quo there?

We are always looking at more unique products, niche products. So we're in process of looking at them and adding to the -- what we are offering.

[Operator Instructions] And our next question is from Ross Taylor of CL King.

A lot of my questions have been answered. But maybe to start out, I mean, it seems like customer acquisition costs seem to just kind of continue to trend up. And I guess, do they ever reach a level or a point in time where it maybe makes you rethink your new customer acquisition model or kind of seek other ways to generate more customers?

That's why we said we are putting more emphasis on our database marketing, so moving from mass marketing towards more to database one-to-one marketing.

Okay. And the final question just relates to your accessories and supplies business. Any comments there as how things are trending or how much incremental effort you may be putting behind that aspect of your business?

It was pretty much flat so we're not putting as much effort at this time. But that doesn't mean we won't in the future.

And the next question is from Mitch Bartlett of Craig-Hallum.

Same kind of line of questioning. Just why not use price more aggressively to drive customer acquisitions? I gather, in my numbers, $54 is the highest customer acquisition cost you've ever recorded. If marketing direct is becoming a little bit cost prohibitive to grow the business, why not use price more aggressively?

We may in the future. But obviously, it will impact the bottom line, so we're both bottom line conscious and try to grow the top line. So we may in the future.

The inventory that you have, you've scaled up your inventory, obviously. There's some favorable buys over the last little while. How has that contributed to your gross margins? Is that a continuing strategy that you'll employ to continue to buy some gross margin?

Yes, it helped the gross margin, as you pointed out. And when there's a cost advantage, we will carry higher inventory.

Okay. And database management, what does that mean when you're marketing to a database, more one to one? Is that the existing base of customers that you're going after to increase your percentage of their total spend? Or. . .

Existing database, x -- obviously, includes ex-customers, they're not active customers. That also includes inquiries, inquiries that never purchased from us.

How is the active customer reorder file? Is it -- year-over-year, is it down? Or is it flat? Or -- I see that the sales kind of flipped a little bit, but the actual customer activity, what's going on?

Reorders as a percent of prior year's total sales was at 79%, so it's not too bad.

We do not have any further questions in queue. I'd like to turn the call over to Mendo Akdag.

Thank you. For the fiscal year 2015, we are focusing on improving our marketing efforts to increase sales. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call.

Thank you for participating. You may now disconnect.