Q2 2021 Petmed Express Inc Earnings Call
Welcome to the Pet Meds conference call to review the financial results for the second fiscal quarter ended on September 32021.
At the request of the company. This conference call is being recorded founded in 1996 pet Meds as America's most trusted pet pharmacy, delivering prescription and nonprescription pet medications and other health products for dogs cats and horses direct to the customer.
<unk> markets its products through national advertising campaigns, which direct customers too.
By phone or on the Internet to increase the recognition of the pet Meds brand name.
<unk> provides an attractive alternative for obtaining pet medications in terms of convenience price and ease of ordering and rapid home delivery at this time I'd like to turn the call over to the company's Chief Financial Officer, Mr. Bruce Rosenbloom.
I would like to welcome everybody here today.
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.
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.
And our most recent annual report and other filings with the Securities and Exchange Commission, Let me now introduce our newly appointed CEO and President Matt Hewitt map.
Thanks Bruce.
Morning, and thank you for joining US my name is Matthew and the new CEO of Pet Meds.
I'm incredibly honored and enthusiastic to join this iconic company and I'm excited to be on this earnings call today.
I'd like to begin by thanking Bruce Rosenbloom for acting as interim Chief Executive Officer prior to my arrival.
Before we update you on our progress on Q2, I would like to first share my personal thoughts and motivations regarding why I'm, so optimistic about pet meds and our future.
First I'd like to introduce you to my Dog Harry was featured on this slide.
He is the latest addition to our family and he is also a puppy in fact areas. The first dog for my family.
Finally had no idea of what we are getting ourselves into its like having a newborn again and as many of your fellow pet parents know puppies can be challenging.
We also can't imagine not having Harry in our lives and we think of him as a member of our family personally. It is for failing to be involved in an organization, where you can spend your time and energy on a business that has a positive social impact in society, while you're focused on generating returns for shareholders.
Now that we've established my personal connection to the business I'd like to spend some time walking through the rationale as to why I believe pet meds, they're great long term investment.
Having a large addressable market is important.
Enables more optionality for new brands and products to be developed it provides more opportunity to develop a myriad of go to market strategies targeted at different cohorts of customer segments.
This also means that there's room for more market participants and for those market participants to coexist and flourish.
The pet industry's total addressable market is very large and it is growing currently it is over $100 billion end of service addressable pet medication market, where we participated to date is approximately $10 billion. We are one of the leading pet pharmacies today and as such I see a future where we can extend our already sizeable customer reach.
<unk> combined with a widely respected and known brand into additional segments of the total pet care market as our future vision comes fully into focus.
In addition to the benefits of participating in a large market. The market timing is also considerably favorable pet ownership has always been high in United States, but we have seen an increase in pet ownership, especially due to the macro effects of COVID-19.
Pet ownership has surged to record Heights, and now seven out of 10 U S households own a pet.
New and existing pet parents will need more pet medications and other related health care services for their pet family members.
As we have seen in other digital e-commerce vertical the adoption curve of the Digitization of retail is a favorable tailwind. This pull forward of digital base retail experiences has now given customers a taste of the future and has created new buying habits are purchasing more products and services online today.
Today, our addressable market is largely dominated by offline sales and we see the trend to purchase online. It's clearly they are very favorable to us.
Pet parents see their pets as an extension of their own families and they are increasingly demanding more healthy pet care options for their furry friends. We see this as a positive trend for pet meds and an opportunity for.
For example, we have increased the number of products that we carry and have started to include specialty dog food and higher end wellness products, which we believe have contributed to the increase in our average customer order value.
Lastly, just like we've seen in the human health care market COVID-19 accelerated the increasing trend for the Digitization of health care in fact in the pet market for the first time regulations related to in person veterinary visits on prescription fulfillment, we're temporarily waived and moved online in unprecedented ways. We think this open.
The door to the acceleration of digital based telehealth services.
As I look at the business. There are several key competitive advantages that we can leverage in the future first our brand is widely known and trusted having a strong brand takes years to develop and our customers look to pet meds as their trusted pharmacy and if their pet medication experts.
We have strong operational and quality efficiency as a pharmacy or customer care integration with our pharmacy is world class, which ensures that customers get their products delivered quickly, but also accurately in our vet partners receive high quality fulfillment and service delivered through that platform.
Our deep experience with the vet community they late and competitive advantage. We currently have one of the largest direct to consumer bet networks and the online retail space Pet Meds has a large network of over 70000 veterinarians that we have worked with over the company's history.
Our online vet portal currently has 17000 veterinarians and vet clinics. This has been a core capability in asset because it enables us to expand our fulfillment capability as we scale our business.
A prescription medication authorization rates are the highest they have ever been which speaks volumes to the level of veterinarian cooperation we ever see.
Our pet pharmaceutical category teams is something that I view as a unique strength being a differentiated provider allows pet meds to focus our offering, especially as the market continues to get even more competitive again more to come on where we see our branded business growing in the coming months.
<unk> has long enjoyed close bonds with many of our supplier partners those relationships and develop over time, they become even more strategic today, we have direct relationships with all of our major suppliers and we partner with them to market their products to our customer base.
Our customer service and overall customer Centricity eat those permeates, our culture and our team I personally sat in on hours of phone calls between our customers enter service agents and I've never experienced such a tightly integrated and empathetic customer centric organization in my entire career.
We don't just have a transactional interaction with our customers we have built trusted relationships.
Before we comment on our earnings performance I would like to reiterate several compelling reasons to invest in to continue to invest in pet meds pet meds has several core fundamentals that are compelling, including a strong balance sheet. We do not have that we have over $100 million in cash and we are cash flow positive we have.
A long history of providing shareholder returns through our dividend and a strong return on equity that has been historically over 30%.
We have started to build a recurring subscription base to our customers with a program, which we just recently launched in July of this year through our new auto ship and save program, where we're building higher lifetime value and recurring relationships with our customers.
In September approximately 20% of our customers signed up and order via our auto ship and save subscription program and that number continues to rise.
Our customers responded very positively and enrollment in auto shipments Dave has increased steadily throughout the quarter. We expect many of our reorder sales to eventually transition to auto ship and say by the end of our fiscal year, which will only continue to strengthen our relationship with our customers.
We also continue to have a large base of returning customers, which is an indication of the quality of service and the value that we deliver to our customers.
So to sum up the core company strengths, we have over 25 years of experience as a pure play pet pharmacy only licensed in 50 states delivering fantastic service and value, which is recognized by our customers and continues to be rewarded with their loyalty. Our NPS score is over 80, which puts us in the upper quartile along with some of the most beloved brand.
And the World, we are a direct to consumer brand with a rapidly growing addressable market and we have successfully serviced more than 2 million active customers over the last two years.
Now I would like to have Bruce Rosenbloom, our Chief Financial Officer review, our financials for the quarter.
Thanks, Matt now will review the financial results, we will compare our second fiscal quarter ended on September 32021 to last year's quarter ended on September 32020, and in some cases, we'll refer back to September 32019.
Similar to the quarter ended June 32021, we faced a unique situation comparing two totally different environment between 2020 pandemic in 2021 post pandemic, we were coming off a strong September quarter last year, which was primarily driven by increased e-commerce demand as a result of the pandemic.
Which caused many retail stores to close many veterinarians can be unavailable.
However, during the most recent quarter, while the pandemic was abating and retail stores and veterinarians, we're open for business.
<unk> market continued to surge with increased demand dramatically driving our CPC and CPM rates by more than 50%.
As a result, we spent approximately 33% mentioned in advertising due to these cost increases.
For the second fiscal quarter ended on September 32021 sales were $67 4 million compared to sales of $75 4 million for the same period. The prior year, a decrease of 10, 7%, but sales were only down three 6% versus the quarter ended September 32019 prior to the.
Pandemic.
The decrease in sales was due to decreases in both new order and reorder sales our sales were negatively impacted by a much more competitive market in a crowded advertising space with substantially higher cost compared to the same quarter last year.
During the past six months there was a dramatic increase in veterinarian visits by both pet owners, who are unable to visit their veterinarian during the pandemic. We believe the increase in veterinary visits was primarily due to pet owners needing to visit their veterinarian for their pet exams.
Renew their prescriptions.
Some pet owners purchase medications directly from their beds. During the visit the company believes that negatively impacted sales and especially reorder sales during the quarter.
We were disappointed with our sales results during the quarter. However sales were trending more positive in the months of August and September 2021, when you compare them to August and September 2019, reorder sales decreased by eight 5% to $62 million for the quarter compared to reorder sales of <unk>.
$67 8 million for the same quarter last year.
For the quarter ended September 32019, our reorder sales were $61 9 million.
Encouragingly reorder sales in the most recent quarter walk down versus a year ago were up slightly compared to 2019 pre pandemic, we would expect to see stronger reorder sales in the back half of fiscal 2022, as we anticipate more prescriptions being renewed.
A positive trend to highlight for the quarter was the continued increase in our average order size or average order value was approximately $92 for the quarter compared to $87 for the same quarter last year and $85 for the quarter ended September 32019.
The increase in <unk> can be attributed to a shift in our product mix to more prescription items and less over the counter items with prescription items, having a higher gross margin profile in comparison to over the counter items.
As I mentioned earlier during the quarter ended September 32021, the advertising market was extremely competitive.
This increased demand drove up ad prices dramatically.
As a result, our advertising spending with less efficient than usual and deliberate fewer impressions than in prior years because of this we believe our advertising spending was less effective in the most recent quarter and its ability to attract new customers new order sales decreased by 30% to $5 4 million for the quarter compared to $7.
7 million for the same quarter the prior year.
We acquired approximately 65000, new customers in our second fiscal quarter compared to 96000 for the same period the prior year.
However, we anticipate that advertising prices should revert back to more normal levels.
Endemic further some funds, which should help increase the efficiency and effectiveness of our media spending.
Thereby continue to help us gain more new customers in the future. We are also in the process of reevaluating many of our current marketing relationships, which has resulted in changing some of our marketing partners with the expectation of improved marketing efficiency and results.
For the second fiscal quarter net income was $6 3 million or <unk> 31 diluted per share compared to $8 4 million or <unk> 42 cents per diluted per share for the same quarter last year, a decrease to net income of 25%.
For the second fiscal quarter, our gross profit as a percentage of sales was 28, 5% compared to 35% for the same period a year ago.
The percentage decrease for the quarter can be attributed to some of the major manufacturers shifting their funding from discounting product costs, two cooperative marketing rebates.
There may be an opportunity to improve gross margins in the second half of fiscal year 2022, if the shift to prescription medications continue.
We had $106 6 million in cash and cash equivalents and $19 7 million in inventory with no debt as of September 32021.
The board of Directors also declared a quarterly dividend of <unk> 30 per share on the company's common stock the dividend will be payable on November 19, 2021 to shareholders of record at the close of business on November eight 2021.
The company continues to be committed to returning capital to our stockholders. However, the declaration and payment of future dividends is discretionary and will be subject to a determination by the board of directors each quarter. Following its review of the company's financial performance.
This ends the financial review operator, we are now ready to take questions.
And we will be conducting a question and answer session to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You will be you will not be able to ask a question. If you are listening to the webcast you must dial directly into the call to ask a question and also you May press star two if you'd like to remove your question from the queue as well.
One moment, please while we poll for questions.
And our first question is from Anthony <unk> from Sidoti. Please proceed with your question.
Yes, good afternoon, and thank you for taking the question.
So welcome Matt.
Bruce.
So.
As far as new order sales I mean, obviously you guys did.
So are they felt the impact of the advertising market being lower but.
Kind of what gives you confidence that.
Things will bounce back.
Yeah.
Back half of the COO.
The fiscal year.
Just curious as to what's driving that and then maybe perhaps are you seeing.
Some some good results or better results. So far in the current quarter I guess, it's just wondering about your confidence level about your ability to bounce back with the new order sales.
Hey, Anthony this is Matt and thanks for the questions and great to hear from you again, and then Bruce feel free to chime in a couple of things about that one is.
I would say that we're taking small bites to SaaS approach to looking at our new customer acquisition, we basically have rewired, our entire marketing partnerships and agencies in the last I would say well I've been here two months. So we've done that in the last four weeks.
And that will be rolling out very soon so we're looking at our capital allocation spend to where we spend I think we've been spending too aggressive Atlanta sub channels, where we haven't seen the return that we haven't been taking advantage of new sources of traffic, where we think we have a lot of advantage.
One two is we're spending a lot more tonight rewiring, our system and databases around tracking your customers better.
Focusing on Reengagement.
For rates in general we are seeing some changes to the rate.
The rates out there I think some of the channels like Facebook has obviously gotten more expensive due to the loss of first party data Disney Apple.
A decision. So those are some channels that obviously I think are just still getting hotter in terms of increased CPM and CPC.
But in others, we are seeing favorable trends so it depends on the channel, but for US we're really looking at each channel and seeing how we get increments each channel, which is different than what we did in the past.
Okay got it okay.
And then.
In terms of your gross margins.
You did mentioned that you have been shipping more.
Items like the specialty dog Choppiness.
Much heavier than the typical type of migration so.
As we look to.
Our models here like how should we think about it is this year.
On the one hand, it sounds it sounds like Youre doing a good job of increasing your <unk>, but.
Uh huh.
How is the margin gross margin impact going to be because of that.
Yes, Anthony I'm going to take that question, if you don't mind.
As far as our margins for the past quarter.
We have as we maybe has spoken.
Fine before but our vendors shifting funding to our co op marketing.
Louis discounting products and negatively impacted our gross margins during the quarter and it will probably be like that going forward, where instead of getting price discounts.
The price of the items or the inventory there.
These rebates are these.
Promotions are going to be below the line.
And the advertising line item, so as far as moving forward with gross margins.
Youll see that over and over that's an overriding factor, but however, as we've also seen our shift moving back toward prescription that OTC, we do expect.
Positive trend in margins moving forward because of that going back to some semblance of normalcy pandemic versus post pandemic when it comes to our our mix shift of items.
Okay.
Got it and then.
Most of the copper.
Capital allocation, just curious to get your thoughts Matt as far as.
Looking at pet system for years.
The company has been.
All company with a lot of cash and growing the dividend.
Now certainly maintaining a very healthy cash position.
Wanted to get your thoughts about that as so no. So how should we think about that.
Especially the dividend what are your thought.
I'll start.
Yes, I think there are several things to unpack there it's a great question.
I've been a long listener of past earnings calls as well so I'll try to give it a slightly different answer.
Sure.
I'd say with the dividend, we're always looking at that and.
Always subject to change, but we've been pretty consistent with the dividend and nothing to announce here obviously, but.
To your cash question.
With over $100 million in cash with interest rates being so low there.
I think theres a lot of opportunities in this space to deploy cash.
Allocate capital more efficiently to get higher returns.
There's also a lot of businesses in the pets ecosystem that.
Fortunately in this market different than other verticals.
There's a lot of ways to partner with a lot of ways to look at M&A as well. So we're certainly going to be looking at those in the future.
Since we have such a large cash position.
And lastly, it's a little it's a little early for me to.
Articulate the strategy you have been around for two months I think the first four weeks felt like six months because there was a lot to do in learning and now I'm kind of settling in and feeling better about things like yes, I think theres a lot of opportunity.
<unk> capital differently, especially given the tailwind in pet ownership. So that's kind of a non answer answer Anthony other than I think we're taking a fresh look at that and I would expect that we will make some decisions in the coming quarters that we'll obviously update everyone on.
Got it okay, well, thanks, and best of luck going forward.
Thanks Anthony.
And our next question is from Steph Wissink with Jefferies. Please proceed with your question.
Hi, everybody. Thanks for taking our questions and the first is I wanted to just go back to some of the comments in your prepared remarks around that visits and I think I heard you correctly that there is an inverse correlation mainland that visits go up.
You tend to see that sell prescription and OTC directly into your business feels that impact is that the right way to think about it or is there.
Second derivative where in follow up to those primary prescription you'll start to see some of the secondary prescription refills in your business.
Hi, Steph this is Bruce so now let me address that question, but it really does that visit.
Information was really to try to give us an understanding of what we were seeing last year versus this year.
Last year during the pandemic virtually all of the vet offices were closed.
You know there really wasn't as many alternatives, where a pet owners could turn to for medications that many were trying online pet medications for the first time and so that was definitely something that we welcomed last year. This year all of those clinics are open for business and they're making up for lost time. So.
They are making sure that they haven't seen that pad in a 12 month period. They are enforcing them, making sure that pet owners coming into their clinic. So it's almost a resetting of the prescription cycle.
Many of the pet owners are going to the vet buying there and were in line for the refill and we can sort of to our through our data. We know when it's time for a reorder and we'll go ahead and market for that reorder subsequent reorder and we expect to see that in the second half of this fiscal year is what I was referring to earlier.
On the call.
Okay got it and then my second question is on AD spend I think you mentioned that you expect advertising prices to revert I am curious if you could just give us a sense of do you expect them to go back to pre pandemic levels.
On a purchasing price basis, or do you still expect them to be a bit of inflation post pandemic and related to that I think you also used the word left us.
It's less efficient can you maybe talk a little bit about what youre doing to tweak your marketing mix or your marketing plans out over the next couple of quarters to try to improve some of the efficiency, even if it costs remain a little bit elevated.
Yeah, and I'll take your second question first.
<unk>.
Couple of things.
I would say overall the way in which we've been purchasing media is going to change significantly we're looking at new and they are actually implemented new marketing partners.
To help us with that that specialize in specific areas of of media I won't get into that the channels themselves, but obviously, Google Facebook connected television, there's a lot of options out there and I think the way we've configured media spend to date.
Fresh pair of eyes. So that's one.
Two is just adding more data around the decisions that we're making around our media buys was another.
Take quick win that we've implemented.
And then lastly to your first question.
Immediate rates have been dancing around quite a bit.
The language learning space prior to this with or is that a stone.
And.
We took advantage of favorable rates during the pandemic because advertisers at relieving things like brand advertising to performance I would say going into the holiday season, it's too early to tell since it's a very competitive time to be buying advertising, but I would say that.
I have a little bit more optimistic about rates than than I was when I started two months ago.
Okay. That's great. Thank you for the help.
Thank you.
And again as a reminder, if you have any questions you May press star one on your telephone keypad doing so ensure yourself into the question and answer queue.
Our next question is from Ben Rose.
Battle Road Research. Please proceed with your question.
Yes, good afternoon.
I know, we haven't had a chance to meet map and look forward to.
Meeting you post call.
A couple of questions with regard to <unk>.
With regard to pet health advice.
And on your slides you talked about the.
Growth in <unk>.
Telehealth market.
And was just curious to know what thoughts you have with regard to.
The ask the vet service that you offer now and whether you envision that.
Being expanded in some way or perhaps being monetized in some way in the future.
Hey, Ben and looking forward to catching up in subsequent conversations yes.
Really.
Excited about the pet telehealth space, there's been a lot of innovation in this space, there's a lot of different startups.
Talk to you personally in the space to get some advice I think the way I would start is.
I always try to evaluate businesses not only on the Tam and the timing and the kind of the fundamentals, but also the customer relationships.
The amount of our customers are wanting additional services from us they almost they are giving us permission to give them more advice that we are today.
Prescriptions are in a way the bulk of the back of the proverbial store with the customer because they see patents as the expert in pet health care. It just so happens as the customer is leading the store, we're not providing a lot of expert experience yet and so I see pet telehealth is us being very well positioned to add additional services that we don't see today because.
<unk> really view us as that specialty pharmacies are not viewing this as you know.
The major retailer with lots of different services, we're not known for selling food, we're not selling a known for selling dog toys, we're known for providing expert advice that's out for pet telehealth, while the market is really small.
It's an opportunity to engage with our auto ship customers in really unique ways and then sell them additional services. So nothing to announce but we're certainly going to be doing a lot of testing even this quarter on this capex, which I hope hopefully will be able to talk to you about next time.
Okay great.
With regard to the company's relationships with.
Veterinarian with the.
Veterinarian community in vet clinics. This is the first time that I've heard you.
Quantify the number of veterinarians in clinics that you work with.
And find that to be an intriguing.
<unk> was curious to know.
Plans that you have to perhaps reduce friction with the veterinarians or.
To improve.
Our relationships with them.
Yes, Ben Thanks, Thanks for noticing that and it was intentional to put that in there because I was quite surprised when I first started the company.
We havent that portal.
Today, I would say I've seen other competitors in this space quote numbers and I think that might be surprised that we have a larger network than most.
I think our relationship with that has been.
<unk>.
A little computation will be honest over the span of the company. When we first started because we are the pioneers in this space I think when we would go to the veterinarian conferences, where probably the least likely to be welcome and I think now there is other players in the space and we've kind of opened the door for them.
We're kind of seeing us.
As a more friendly player in this space to be honest, our vet verification rates are as high as they've ever been.
I think there's a lot of things we can do on our portal to make the veterinarians life easy we're very sympathetic to veterinarians, they're overworked. They have some of the highest suicide rates of any profession, and I think that there is a lot we can do to be a better friend to the vet and.
Our vet portal I think has.
Great start, but I think theres a lot of opportunity to automate what they do in their clinics and we're gonna be pro that in terms of how we approach the market. Our intent is not to be anti bot.
Okay. Thank you very much.
Thanks Pat.
And our questions and answers portion of the call has ended I would now like to turn the call back to map the comps.
<unk> CEO.
Concluding remarks.
Thank you.
I wanted to reiterate what Bruce just covered in his financial highlights section. We are disappointed with our sales results for the quarter, but after my two months on the job I am confident there is much we can do and will do to improve our business growth.
Clearing a market that's growing patent it needs to be to make the necessary changes to our operating playbook to take advantage of the market trends in my first weeks here I've listened in on countless customer service called engage with over 20 pet industry leaders brief research analysts and have engaged with our own main pharmaceutical partners.
I've already seen a lot of core areas that we can and have already begun to improve in this business and these include the following.
He was a more data insights to acquire and retain customers better segmentation of our customer base in order to drive more mass personalization of our offers and services.
Improved new customer acquisition through a different allocation of variable marketing spend.
Expanded products and services that are already being demanded by our customers.
Since I've only been with patent for a short period of time I'm not ready yet on today's call to provide a comprehensive future strategy our capital allocation plan for the business, but that would be premature. However, I do have a 90 day and 180 day plan that I presented to our board of directors and I'll be sharing more about our vision and strategy with you during our Q3.
Earnings call.
I'll say this today.
We firmly believe that we can take advantage of the large market tailwind is leveraged the main core strengths, we highlighted today and execute on a broader strategic vision for the company.
Look forward to briefing you in the coming quarters that our strategy and our progress. Thank you for listening operator. This ends the conference call.
Thank you and today's conference call you may disconnect your lines at this time.
Thank you for your participation.
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