Earnings Call Transcript - PETS Q3 2020

Operator, Operator

Welcome to the PetMed Express Inc., doing business as 1-800-PetMeds Conference Call to review the Financial Results for the Third Fiscal Quarter for the quarter ended on December 31, 2020. At the request of the company, this conference is being recorded. Founded in 1996, 1-800-PetMeds is America's most trusted pet pharmacy, delivering prescription and non-prescription pet medications and other health products for dogs, cats and horses directed to the customer. 1-800 PetMeds markets its products through national advertising campaigns, which direct customers to order by phone or on the Internet, and aim to increase 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.

Bruce Rosenbloom, CFO

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'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, 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-PetMed. Mendo.

Mendo Akdag, CEO

Thank you, Bruce. Good morning. Welcome, and thank you for joining us. In the beginning of 2021, we unveiled the brand-new logo to commemorate the company's 25th anniversary. The inspiration for this new logo and brand identity came mostly from consumer feedback. We embrace the opportunity to refresh our brand to best represent pet's health and wellness on our new website platform. Now, we'll review the highlights of our financial results. We'll compare our third fiscal quarter ended on December 31, 2020, to last year's quarter ended on December 31, 2019. For this third fiscal quarter ended on December 31, 2020, our sales were $65.9 million compared to $59.9 million for the same period of the prior year, an increase of 10%. The increase in sales was due to increases in reorder sales. The average order value for the quarter was approximately $88 compared to $85 for the same quarter the prior year. For the third fiscal quarter, net income was $7.6 million or $0.38 diluted per share compared to $6.8 million or $0.34 diluted per share for the same quarter of the prior year, an increase to net income of 11%. Reorder sales increased by 12% to $60.2 million for the quarter compared to reorder sales of $53.8 million for the same quarter the prior year. We are encouraged with the continued strong reorders. Our customer retention has increased with the help of our loyalty and easy refill programs and our new website platform. New order sales decreased by 7% to $5.7 million for the quarter compared to $6.1 million for the same period the prior year. However, for the nine months, new order sales increased by 10%. We acquired approximately 73,000 new customers in our third fiscal quarter compared to 76,000 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 season. For the third fiscal quarter, our gross profit as a percentage of sales was 29.8% compared to 29.5% for the same period a year ago, an improvement of approximately 25 basis points. General and administrative expenses as a percent of sales were 9.8% for the quarter compared to 10.1% for the same quarter the prior year. We were able to leverage the G&A by increased sales. For the quarter, our advertising expenses were relatively flat at $3.2 million compared to the same quarter the prior year. Advertising costs of acquiring a customer for the quarter was approximately $44 compared to $42 for the same quarter of the prior year. And for the nine months, it was $49 compared to $53 for the nine months of the prior year. We had $106.5 million in cash and cash equivalents and $28.2 million in inventory with no debt as of December 31, 2020. Net cash from operations for the nine months was relatively flat at $21.6 million compared to the nine months last year. This ends the financial review. Operator, we're ready to take questions.

Operator, Operator

Thank you. Our first question is from Erin Wright with Credit Suisse.

Erin Wright, Analyst

First, with the new customers that were added during the pandemic, how are you seeing the purchasing behavior of particularly those customers that adopted new pets during the pandemic? How do you anticipate the spending for that cohort will trend, for instance, in year two and beyond?

Mendo Akdag, CEO

It's going well, as you have seen our reorder sales increased by 12%, which means that the customers that we added during the pandemic are reordering, which is a good sign.

Erin Wright, Analyst

And as a follow-up to that, the loyalty program. Can you speak to some numbers around that in terms of traction or adoption on, and how that's progressing relative to your expectations?

Mendo Akdag, CEO

Approximately 20% of the orders have loyalty credits in them, so it's being used fairly well.

Erin Wright, Analyst

And then one last question. Have you thought or contemplated around services beyond pharmacy like telehealth platforms or other services that you could kind of link or co-market across your platform?

Mendo Akdag, CEO

Yes, we're exploring them. We'll be focused on them next fiscal year, and we will give you more information in the later part of the year.

Operator, Operator

Our next question is from Anthony Lebiedzinski with Sidoti.

Anthony Lebiedzinski, Analyst

So first, obviously a very solid reorder sales growth but new order sales were down. Mendo, what would you point to as the primary reasons why new order sales were down in the quarter?

Mendo Akdag, CEO

The market was more promotional during the holidays that negatively impacted the new order sales, but it's also our off peak season. So, we'll be more aggressive with advertising during the peak season when demand is strong.

Anthony Lebiedzinski, Analyst

Typically, during the off season, we see a sequential improvement in gross margins between the second and third quarters, even though there was a slight decline compared to the second quarter, but it is still up year-over-year. I was curious if there was a significant change in the shift of the business between prescription and over-the-counter products, or if the margin impact from the loyalty credits played a role. Can you provide more details about the gross margin?

Mendo Akdag, CEO

Product mix was a little different. And as I said, the market was more promotional during the holidays compared to the September quarter, which to be competitive, we attempted to match the market.

Anthony Lebiedzinski, Analyst

I was just wondering about the impact of the loyalty credits on the gross margin.

Mendo Akdag, CEO

There were more promotional discounts in the quarter compared to the same quarter last year.

Anthony Lebiedzinski, Analyst

Got it, but you’re not able to quantify that I guess at this point. So lastly as far as your outlook for advertising expenses, as far as new customer acquisition costs, how should we think about that?

Mendo Akdag, CEO

We'll be more aggressive during peak season when demand is strong. I would anticipate double-digit growth on advertising expenses.

Anthony Lebiedzinski, Analyst

In the fourth quarter or next, as far as that...

Mendo Akdag, CEO

During the spring season, the peak season starts in March. It depends on the weather conditions; we'll see what happens.

Operator, Operator

Our next question is from Ben Rose with Battle Road Research.

Ben Rose, Analyst

A few questions to begin with Mendo. In terms of the rollout of the website enhancements, is that relatively complete at this stage and what is your assessment of the improvement?

Mendo Akdag, CEO

It is not complete yet. We anticipate it will be completed by June, but it will be substantially probably completed by the end of March. I would say full completion by June. We did some A/B testing, comparing the new design with the old design, and we were predicting some sales lift, approximately a 2% sales lift.

Ben Rose, Analyst

There has been much discussion about the impact of the aging pet population, particularly with pet adoptions being up over the last number of months during COVID. Are you seeing any shift in your product mix that would suggest that that's occurring?

Mendo Akdag, CEO

The product mix is shifting to prescriptions, but that's driven by the veterinarians. So, the OTC is coming down and prescriptions are growing. There is some growth in medications beyond maintenance; chronic illness medications are growing.

Ben Rose, Analyst

You know you have a couple of customer benefits on your website that I don't think are, at least in my opinion, that well understood, but one is the ability to offer compound medications. I know you've been doing this for quite a while. Do you have a formal outreach plan in place to reach the veterinarian community to let them know about this?

Mendo Akdag, CEO

We are not offering to the veterinarians. We're offering it to our customers. It's filled by a third-party compound pharmacy.

Ben Rose, Analyst

Has it been increasing in popularity over the last several quarters or?

Mendo Akdag, CEO

Yes, it is.

Ben Rose, Analyst

And the ask-a-vet feature that you have on your website, have you noticed an increase in the number of customer inquiries in terms of customers wanting to speak directly to a vet about their pet conditions?

Mendo Akdag, CEO

On our new website redesign, the ask-a-vet feature is going to be more prominent. So, it was not prominent in the old design. We anticipate that we'll see more activity going forward.

Ben Rose, Analyst

And another question is, does PetMed have a very well-established brand, as I understand it as a function of its net promoter score reflecting that. Have you given any thought to developing branded merchandise for PetMed, that is to say non-medication pet-oriented merchandise with the PetMed brand?

Mendo Akdag, CEO

We do have OTC medications under our brand. We did not think about beyond medications at this time.

Ben Rose, Analyst

And then finally, if I may in concert with the increase in advertising that you're anticipating during peak season, do you think we'll see a pickup? I guess two questions. One is, will we see a pickup in TV advertising; and then secondly, will there be kind of a renewed emphasis on the brand either by way of a new brand campaign?

Mendo Akdag, CEO

Yes, you will see some more activity on television advertising. We'll likely double our budget from last year on television.

Ben Rose, Analyst

And then as far as any kind of thoughts to new branding or enhanced branding, generally speaking.

Mendo Akdag, CEO

Yes. Obviously, we'll use our new refreshed brand in our advertising.

Operator, Operator

And at this time, I'm showing no further questions. I'll turn it back to you, sir.

Mendo Akdag, CEO

Thank you. The next fiscal year, we'll be exploring alternative ways of acquiring customers and adding value-added services. We’ll continue investing in our e-commerce platform and mobile app to better service our customers. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call. Thank you.

Operator, Operator

Thank you for participating in today's conference. You may now disconnect.