Q2 2020 Petmed Express Inc Earnings Call

[noise] [noise] good morning.

Yes.

Welcome to the Pet might express incorporated doing business as one 800 Petmeds conference call to review the financial results for the second fiscal quarter.

Quarter ended on September Thirtyth 2020.

At the request to the company. This conference call is being recorded.

Founded in 1990, 618 hundred Petmeds is America's most trusted pet pharmacy, delivering prescription and nonprescription pet medications and other health products for dogs cats and horses direct to the consumer.

One 800, petmeds markets its product to national 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. One 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.

But you are going to welcome everybody here today.

Unfortunately, due to a personal matter met all our president and Chief Executive Officer is unable to answer on this morning's call in school.

I want to remind everyone that the first portion of this conference call will be listening one 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 19 antibody.

Or the Securities and Exchange Commission that May involve a number of risks and uncertainties. These days.

Those are based on our beliefs as well as assumptions reviews 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.

Thank you for joining us and we hope everyone is continuing to stay safe and healthy.

During the September quarter consumer demand settle down due to a combination of debt clinics and brick and mortar pet retailers opening up and consumers having stocked up in the June quarter.

We have an open during our normal business hours without any material disruption to our operations. We are still taking measures to ensure the health and safety of our dedicated employees.

By allowing them to work from home, where possible and continuing with social distancing and enhance disinfection in the workplace.

Also we have not seen any major disruptions in our supply chain. However, we have experienced some delays and delays in the delivery of the slow to media moving inventory items.

Now we will compare our second fiscal quarter ended on September Thirtyth 2020 to last year's quarter ended on September Thirtyth 2019.

For the second fiscal quarter ended on September Thirtyth 2020, our sales were 75.4 million compared to 69.9 million for the same period the prior year, an increase of 7.9%.

For the six months ended on September Thirtyth 2020 sales were 171.6 million compared to 149.9 million for the six months of the prior year, an increase of 14.5%.

Increases in sales were due to increases in reorder sales for the quarter and increases for both new order and reorder sales for the six months.

The average order value was approximately $87 for the company for the quarter compared to $85 for the same period last year.

For the second fiscal quarter net income was 8.4 million or 42 cents diluted per share compared to 6.7 million or 33 cents diluted per share for the same quarter of the prior year, an increase to net income of 26% and for the six month net income was 16.2.

A million or 81 cents diluted per share compared to 12 million or 60 cents diluted per share a year ago, an increase to net income of 35%.

Reorder sales increased by 9.6% to 67.8 million for the quarter compared to reorder sales of 61.9 million for the same quarter of the prior year.

And for the six months reorder sales increased by 14.3% to $148.2 million compared to 129.6 million for the same period last year.

New order sales decreased by 5% to $7.7 million for the quarter compared to $8.1 million for the same period, the prior year and for the six months, New order sales increased by 15.4% to $23.5 million compared to $20.3 million for the same period.

Last year we.

We acquired approximately 96000, new customers in our second fiscal quarter compared to 98000 for the same period. The prior year and we acquired approximately 282000, new customers in the six months compared to 238000 for the same period a year ago.

The seasonality in our business is due to the proportion of fleet 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 second fiscal quarter, our gross profit as a percentage of sales was 30.5% compared to 28.6% for the same period the prior year and for the six months, our gross profit as a percentage of sales was 29% compared to 27.9% for the same period a year ago.

Gross margins improved by 190 basis points for the September quarter, and by 110 basis points for the six months the increases were due to the benefit of having direct relationships with all major manufacturers and these manufacturers have minimum advertise price policies also our product mix shifted to high.

Margin prescription medications during the during the September quarter compared to the June quarter.

General and administrative expenses as a percentage of sales were 9% for both the quarter and the same quarter last year.

For the quarter, we spent 5.1 million an advertising compared to $4.8 million for the same quarter of the prior year, an increase of 8%.

For the six months, we spent $14.2 million in advertising compared to $13.4 million for the six months a year ago, an increase of 6%.

The advertising cost of acquiring a customer was approximately $54 for the quarter compared to $49 for the same quarter of the prior year and for the six months of the $50 compared to $56 for the six month last year the increase for the quarter was due to increases in advertising costs.

We had $106.3 million in cash and cash equivalents and 21.5 million in inventory with no debt as of September Thirtyth 2020, net cash from operations for the six months was $15.2 million compared to $17.3 million for the same period last year.

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

Thank you Mr. Rosenblum at this time, if you would like to ask a question. Please press star one on your Touchtone phone. Please ensure that your line is muted. Please record your name and company to be introduced once again. Please press star one at this time to ask a question.

Our first question is from Erin Wright with credit Suisse.

The line is open.

Great. Thanks.

What's your mix of.

Over the counter versus prescription medications now we changed here and can you remind us of the profit profile.

You see versus prescription and particularly given that not pricing strategy.

Thanks.

Sure thing.

If you remember call in the June quarter, we saw an uptick in LTC.

This.

Little bit more and uncharacteristically increases a little bit it was different from our normal mix. The September quarter was more of a normalized mix. Although we did see a bit of an increase in Rx over ODC and obviously as we mentioned previously a prescription medications have a higher margin profile than the OTA.

C products.

Would you say that prescription and over half now.

Over half of our total sales, yes, Oh, yes definitely moved much more now.

Okay, Great and then.

Speaking of the cold majoring in customer base I guess, how much is there a paradigm shift to online birthday, just some stockpiling given Kobe side I am curious kind of how we should be thinking about sort of new customer growth over the balance of the year.

What you're seeing in terms that Kobe driven customer me right overall demand has settled down with the combination of the vet clinics in brick and mortar pet stores opening up and also as you mentioned consumer stocking up in the June quarter also our new website platform might have had a temporary nature.

The effect on our natural search during the quarter, which may have negatively impacted our new order sales in the short term and what we saw in the September quarter. We are now in the second phase our ecommerce platform. We're now focusing on redesigning our website and mobile app to optimize our customer's digital experience, which should improve our new customer conversion.

And in the future as far is coded I mean, it's really an unknown right. Now obviously were seeing cases, increasing overall in the majority of the states in the US. So we'll just have to see how that.

On how that.

How those trends overall affect our business.

As of right now.

We did see demand settle down with the opening of those clinics in the retail stores, but overall, we've seen reorders become extremely strong and it may also be because of the increase new customers that we were able to take and for the six for the first six months of our fiscal year.

Okay, great. Thank you.

Thank you for your question. Our next question is from Anthony Lebiedzinski with Sidoti and company. Your line is open Sir.

Yes, good morning, Bruce and thanks for taking the questions. So I guess my first question.

So you know look kind of looking back now at the first half of the fiscal year, yet you mentioned that there was some.

Sounds like some some pull forward of demand in the June quarter.

Any way you could possibly maybe try to quantify how much you think a you saw a pull forward into the June quarter.

We usually don't wait to quantified to give that information we do know what that number is internally again. It's also as we mentioned we were in the phase the first phase of our website.

Our new E commerce platform and so that may have negatively impacted reorders as well. So we have an estimate theres a few assumptions involved with that but we're not really prepared to give that number out at this time.

Okay, Thats fair enough and then so as far as the second phase of the website improvement when do you expect to have that completed.

Our target date is during this third quarter. So hopefully by the end of the year, we should be launched.

Finally with both the.

The redesign of the website and also the mobile.

Got it Okay, and then you mentioned the AD spending being up I know in the past.

You've had increases in cost because of the election.

Was the increase in advertising spending because of that it was there something else going on.

It did have probably a small effect, but I think overall it was more of a normalized increase in overall keyword search.

Yes, that's the majority of our online spend advertising costs increased during the quarter.

We saw increased competition as well with the vet clinics and also increased competition with online keyword searches as well.

But well always attempt to be more aggressive during peak season. When our demand is strong you know as you know we have a flexible AD budget and.

Our advertising spending is also going to depend on the return on investment.

Got it Okay and then last question from me so so.

Now that you are moving into the off season.

Typically the gross margins for you guys are higher and the off peak.

Second fiscal second half of the fiscal year.

So you had a nice improvement in the gross margin on a year over year basis as well as sequentially.

So with that in mind should we expect.

Further sequential improvement in the back half of the gross margin how should we think about that.

No we don't manage the margins quarter to quarter. As you know you sort of look at margins on an annualized basis. I mean annually. There is an opportunity for modest margin improvement year over year, and we expect that to continue if there's an opportunity to maximize margins. We're going to go ahead and do that but also we want to remain competitive on the price.

Pricing and of course with that pricing in place and we also want to be competitive with.

The other players in our space as far as promotions and offers so we'll see how it shapes up but you're right treated are traditionally trends the trends have been historically that margins will rise during the off season and Thats also because we tend to see more of a shift a prescription over otcs during those time periods.

Got it okay. Thank you.

You're welcome.

Thank you for your question as a reminder, if you would like to ask a question. Please press star one and record your name and company to ask a question. Our next question is from Ben Rose with Battle Road Research. Your line is open Sir.

Yes, Thank you and good morning Bruce.

Two questions first.

First off in terms of.

The advertising and promotion this quarter was there anything done to perhaps incentivize or or.

Focus people more on the prescription side of the business or was this just sort of a natural trend back to your typical mix of prescription versus ODC. Yeah. It was more of a movement to our typical trend and again, we've always we have seen a rising increase in our mix more.

Towards prescriptions and over the counter obviously.

Obviously veterinarians are recommending Moreover, the more prescription products war, Saranow Tc and obviously.

Obviously, we prefer to be more skewed towards prescription, which have higher margin profile. So it was more of a return to nor a normalized state. Although I did mention prescription medications did see a bit of an uptick during this quarter year over year I think June was more of an anomaly.

I think it was more so with both brick and mortar and veterinarians having limited hours.

New online new customers move towards online and those online customers were purchasing over the counter products.

Okay, Great and sorry, Bruce just to clarify one thing you said about the website redesign in the first phase.

Did you say that that May have had a negative impact on the reorder rate. This yes, it's possible with that new ecommerce platform had a negative impact on our natural search so that took a while to get back to its normalized stage.

Were there currently and we expect with many of the changes we have made we should see an improvement in our new customer conversion in the future.

Okay and on the inventory situation looks like you did work down quite a bit of inventory in the quarter, which was a conservative some.

Heading into this quarter in your prepared remarks, you mentioned that there was there were some delays in this low to medium.

Moving items, which.

I guess in the Grand scheme of things is less concerning can you speak to just the overall.

Supply chain environment.

Albeit heading into you know.

The weaker season, but just your.

Speak to the confidence you have your own ability to.

Procure the lion's share of the medications that you need.

Right. So again your inventory will fluctuate based on promotional buying opportunities.

We mentioned that back in the June quarter.

I did make a conscious decision to stock up due to the uncertainty that co that presented itself overall when there's a cost advantage will carry higher inventory during the pandemic. We did look to carry more inventory you know to me.

Minimize any related delays, we did see those delays in some of our small to medium movers.

More manufacturer backwater type delays.

Also shipment or lead time delays some of those some of those delays, we should be able to rectify with increased EPS.

With the increased inventory purchase some we may not be able to their more manufactured driven delays. So we'll see where we can stock up we will I would not expect to stock up like we saw in the joint the June quarter, where inventories yet were in excess of 40 million, but we will try to stock up.

Inventory to make sure that we can minimize any type of a covert related delays for our customers.

Okay, great. Thanks, very much you are welcome.

Thank you for your question and that comes from Kevin Ellich with Ace Research. Your line is open.

Hey, Bruce Thanks for taking the question. So you know going back to you know the new customers that you added for the quarter was little bit lower.

Than we've seen for in your fiscal second quarter over the last several years you know what the b shaped recovery, we've seen in bed visits.

In the September quarter.

Do you think this is more a function of no competition or.

What do you think is driving that.

I mean again competition does play a role I think more importantly, it was the combination as I mentioned the combination of that clinics in brick and mortar pet stores opening up we also had that temporary negative effect on our natural search results, which also affected.

Possibly new customers as well so as I mentioned I think moving into the off season, we definitely have an opportunity to improve on our new customers I think overall for the six months were fairly satisfied with the result, we will continue to make improvements and tweak advertising where need be and and we'll see.

If we can wrecked.

Rectify that a temporary downswing.

Got it got it and then you know it looks like one metric I check is new customer transaction size, which seems like it's it's been it's down a little bit this year.

You think that's more a function of coated warranties that map pricing or kind of all the above.

Yeah, I'm not sure exactly what measures you're referring to but overall those definitely have a play when it comes to new order advertise also new orders, we do tend to be a little bit more promotional to attract new customers to be competitive with others in our space.

Got it got it and then lastly on Capex was a little bit higher this quarter is that a function of the website, just some seasonality and a 100% that was that was the web site and we really don't expect any material capital expenditures moving forward more maintenance mode and.

I mean overall overall it should be fairly minimal got it and then lastly, again gross margin.

Much better than expected I know seasonally Q2 is youre you saw in this quarter you probably have the year bump and it's been a little different the last couple of years, but you know how do you think we'll continue to see that sort of strength you know for the remainder of the year.

As I mentioned to Anthony earlier, you know again.

Prices overall stabilized in the market with the manufacturers enforcing the minimum advertise price policies.

Our product mix was different from what we saw in the June quarter. So those all encrypt contributed to increase to our margins bottom lines. We have if we have increased prescription sales, we're going to probably have higher margins. You know the one area that could have a negative effect to margins would be you know promote.

Shins for new customers. So if we have a quarter, where we are positive and new customers that could have a negative impact on margins, but.

Where the gross margins end up will be dependent on our product mix and you.

Again looking at it from quarter to quarter can be difficult, but I think overall year over year, we expect to see modest improvements in margins.

Sounds good thank you.

You're welcome.

Thank you for your question, we have a follow up the Marin Wright with credit Suisse. Your line is real thing.

Great. Thanks for taking the follow that's great I'm sure has anything changed in terms of your manufacturing relationship I guess in new relationships, sorry, relatively static CLO and where they are increasing not crazy and I guess, how did that contract typically work right you know again.

When we talk about demand your side the direct relationships with manufacturers, it's really talking about the large five manufacturers there we do have direct relationships.

Which.

Many are at least two or three initiate were initiated in 2019. So yes. Some we do have contractual relationships with them and they have been enforcing map pricing, which has stabilized prices in the online space and.

That is helpful. When they have their place it with manufacturers increase their prices. They also increased map. So that also helps as.

As well as far as margins and.

Also the pricing inventory.

Okay, great. Thanks, and then one last question here just Stein.

Generics I guess do you have any metric on the generic prescription dispensing rate Brandon.

Changed at all given the means actually relationships.

And we do I mean, not materially I mean, many of the manufacturers prefer us to promote their brands and they and they.

We'll give us incentives to promote their brands say over generics, but I would say our generics or are up year over year, but overall you know it's still about the same as a percentage of sales.

And there's still no.

I guess seamless way did you generic.

Correct.

Yes, it does.

The the current rules and regulations.

Pharmacy rules or regulations.

Definitely prohibit that seamless generic substitution that is that is present for human pharmacies that for human physicians. So if there is a change we do have to go back to that for their approval. So that does make it a little bit more difficult, but for the most part our relationships with the banks are probably at the.

The best point as it's ever been.

Our authorization rates are are probably at its current peak and so when we do go back to the dashboard generic substitute on more and more often than not their answer is yes.

Okay, all right great. Thank you. Thank you Ryan.

Thank you for your question I will now turn our call back over to Bruce Rosenbloom Company, Chief Financial Officer for closing remarks. Thank.

Thank you in fiscal 2021, we are focusing on redesigning our website and mobile app to optimize our customer's digital experience. Thank.

Thank you very much this wraps up today's conference call. Thanks for joining US operator. This ends the conference call.

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

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