Q2 2022 Petmed Express Inc Earnings Call
Welcome to Paas last conference call to review the financial results for the second fiscal year ended September .
2022.
The request of the company this call is being recorded.
Founded in 1996, but that isn't going to be their trusted pop health expert delivering prescription and nonprescription pet medications.
Their health product for dogs cats, and horses direct to their customers.
That much market its products through advertising or promotion campaign, which directors direct customers chaga online or by phone and wage are intended to increase their recommendation upsides, but right.
Does that mean that.
<unk> provides and.
Check to 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, Brian Mr. Brian <unk>. Please go ahead.
Thank you operator.
Like to welcome everybody here today.
Pet Meds Express fiscal second quarter 2023 conference call.
I would also 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.
Certain information that will be included during this call may include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 or.
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 results could differ materially from those projected.
The company undertakes no obligation to update these statements based on subsequent events, 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 our CEO and President Matt Hulett, Matt.
Tired company, a passionate pet lovers has rallied around our new vision that every pet deserves to let a long happy healthy life.
Actualize this vision.
Are shifting from being simply a leading pet medications retailer to being the pet health experts a market leader in pet health care expertise.
This is a natural and logical transition as for the last 26 years millions of pet parents have chosen <unk> as their trusted partner in carrying for their pets.
For anyone new to the company pet meds delivers prescription and nonprescription medications and pet supplies direct to the consumer our expert online pharmacy is an established and trusted brand as evidenced by the fact that we have served over 11 million customers over our company's operating history.
I have now been CEO and president pet meds for a little over a year and during this time management has been executing on a very specific strategy to revitalize happening.
Over this last year pet meds has been in a rebuilding mode with a new and experienced management team and updated strategy and.
The revised overall approach to the market.
We will break today's call into two themes, one an update on our core business and to update on the progress of our business transformation.
The headline for the quarter was that the overall business will stabilize on a year over year basis in terms of sales led by a strong recovery of our repeat customer base.
As we have discussed in previous earnings calls <unk> has a high concentration of our business and flea and tick and heartworm medications.
Although pet meds last two quarters were impacted by a slow start to the play and tick season due to unseasonably cold temperatures, we saw a solid rebound of our business during the mid to late part of last quarter with warmer temperatures returning to much of the country.
This has stimulated more normal flea and tick and heartworm medication demand from pet parents in the second fiscal quarter when compared to the first fiscal quarter.
I will provide an overview of our second quarter results and then our CFO Christine Chambers, who will go into greater depth on our overall profitability later in the presentation.
Second quarter sales were $65 4 million compared to sales of $67 4 million for the same period. This prior year, we were encouraged to see the year over year sales gap close with our returning base essentially flat to our year over year trend.
This trend reverses the double digit declines we've experienced over the last few quarters.
Our new customer count for the quarter was approximately 61000 and our LTV to CAC for the quarter was 2.1, we saw continued improvements in our ability to attract new customers on a year over year basis.
To reiterate we believe LTV to CAC is a more meaningful measure embarking value creation versus using pet meds historical ROE as a metric.
We expect to see customer lifetime value grow as we migrate more of our returning customers to our auto ship and same subscription program and expand average order value over the life of our customers.
Throughout today's call, we will detail the specific plan to expand our customer's basket.
<unk> continues to invest in the business in the form of people and technology to modernize our company for future growth. For example, we have made additional investments in better data analytics, which is included in the 900000 year over year increase in Capex.
<unk> EBITDA was $7 1 million down $2 8 million year over year, and net income was $2 6 million.
The second thing we want to highlight is our business transformation and the strategy driving.
In the past months, we have very deliberately revitalized pet meds mission vision cultural values and strategy, we envision a world where the majority of that services in pet care are enabled digitally and we wanted to be at the forefront of this digital transformation we.
We as an industry are in the early days, but it is coming rapidly we believe that a digitally enabled and data driven future will be the preferred mode of health care delivery for pet parents, we see the pet health care moving digital and fast now.
Now, let us dive deeper into the details of the presentation material.
Always like to feature pictures of our customers and employees pets in our slide deck, you will see many original photos throughout this presentation.
<unk> with this slide which features my dog Harry.
Pet meds customers since he was eight weeks old.
Let us look at the current market and our perspective on the overall opportunity.
Pet Meds has historically been a lower growth high dividend based company.
<unk> also has an amazing set of core assets and capabilities that we plan on leveraging to restart the growth in the pet business, including <unk>.
Pet meds is profitable with a strong balance sheet, we do not have any debt we have approximately $97 million in cash as of September 30th 2022 and we are operating cash flow positive.
Our brand is both widely known and trusted our own market research indicates that 55% of U S. Pet parents are aware of the pet Meds brand, having a strong brand takes them years to develop and our customers tell us they look at pet meds as their trusted pharmacy and pet medications expert.
We have over 26 years of experience as a pure play pet pharmacy fully licensed in 50 states delivering outstanding service and value.
Our long standing domain expertise in pharmacy isn't what I would call. The most complicated part of the pet ecosystem, which makes a progression into other segments much easier.
His expertise as a pharmacy has also enabled us to establish very deep roots in the pet health care industry, and our decades long experience with the vet community is a significant competitive advantage.
We have one of the largest direct to consumer bet networks and the online retail space with over 70000 veterinarians, we have worked with over the company's history.
Because of our industry, leading service relationships with Beth or prescription medication authorization rates are the highest they have ever been which speaks volumes to the level of veterinarian cooperation we receive on a daily basis.
Our customers Love, our brand and our service our NPS score is over 80, which puts us in the upper quartile alongside some of the most beloved brands in the world, we provide a 100% satisfaction guarantee to our customers and we go the extra mile for our customers with generally empathetic and expert service.
We don't just have a transactional interaction with our customers. We have built trusting genuine relationships our customers view <unk> as a trusted pet health expert and we take that responsibility seriously.
To bring that to life for you I wanted to highlight a recent interaction.
This customer had with Mandy who is one of our incredible pet care Representatives.
After Mandy sensitivity handle this situation, where the customer needed some vital medications broker dog.
Customer had this to say about her experience with patent as well.
Well I happen to love your company. The most because what you say is what you do in other words I know that you care about your patience your customers, meaning the animals and I know you care about their owners.
And that does not exist in today's society. So thank you. So very much in particular I'm also very proud to have heard mandates respond to the customer quote I like to walk my talk on a woman of my work. So I like working for a company that does exactly that as well.
Yeah.
We're proud of our pet parents centric culture, and we're proud of Mandy and or pet care team for providing fantastic service.
Our auto ship program continues to grow and expand approximately 39% of our revenue was recurring revenue derived from our auto ship subscription program during the second quarter.
This is a 15% increase on a sequential basis auto ship continues to be a very strategic labor for pet meds, especially considering that the focus of pet and as the business has historically been solely focused on the prescription refill business.
We continue to believe that we can expand it from an Rx focused business model with recurring revenues that are consistently growing as a basis for LTV expansion be a catalog expansion.
We continue to have a large base of returning customers, which is a reflection of the service quality and value. We deliver specifically we have over 2 million pet parents, who have purchased from us over the last two years.
This loyalty can be evidenced by our returning customer base. This last quarter. We have recently seen a reorder base stabilized lapsing the COVID-19 rep bump we experienced in 2021.
In addition, Pat.
Just moving much of our business from a transactional direct to consumer model to a subscription business.
Subscription businesses are clearly compelling business models due to the predictable and stable recurring cash flows as I mentioned at the beginning of the call. We ended the month of September with approximately 39% of our sales enrolled in our auto ship and save subscription program and we anticipate this number will continue to rise.
As we covered in our previous earnings calls pet Meds operates in a vast and growing addressable market. The U S. Pet market is over $120 billion in sales the addressable pet medication market, where we purchase a pay today is over 10 billion and growing rapidly over time <unk> will be offering a more extensive assortment of products and serve.
Mrs that addresses a broader addressable market across the pet wellness market in.
In addition to our investments in best care, which is a $35 billion market, we plan to broaden our product catalog and consumables, a $48 billion market and other services well today at pet Meds. The majority of our business is prescription focused we expect our revenues to be more diversified over time as we address a broader range of our pet parents needs.
Whereas we like to think about it from nose to tail.
The pet space has proven to be a resilient vertical even in recessionary times pet parents see their pets as an extension of their own families and increasingly demand more healthy pet care options pet.
Pet parents are less likely to reduce their pet purchasing budget, especially in the consumable and medication categories.
U S household pet ownership has increased over time and today, 70% of U S households, now on APAC those pet parents will need N seek health and wellness care provided by a trusted brand.
40% of Pet parents spent more on wellness services and products in 2020 one than in 2020, and we see this trend continuing.
Consumers also now expect everything to be a real time fast and digital a trend impacting every industry. The E. Commerce channel continues to expand rapidly we expect the pet vertical to follow this expansion just like we've seen in other digital e-commerce verticals.
Day, our addressable market is largely dominated by offline sales, but we see the growing trend to purchase online as an opportunity and very favorable to us we.
We have also seen a real trend towards the Digitization of pet health care, just like we have in human health Pet parents are thinking through the entire spectrum of their pets' care from diet to veterinary services and from infancy through old age and they are reexamining the channels through which they access those products and services, we believe pet meds is uniquely.
Positioned to take advantage of these trends.
Turning to slide nine we discuss our four strategic pillars that we will be executing on nutrition education wellness and care with data about driving and being at the heart of our services.
We now have exciting news on perhaps the most strategic bet pet telemedicine.
We now have pet telemedicine capability live on pet Meds Dot com, where our new service called that lives there.
That live connect pet parents to thousands of licensed veterinarians ready to provide the best online vet services through a video chat appointments 24 seven.
We believe that we are the only online retailer that offers pet telemedicine and that this offering strategically sets peptides. Apart. We also believe pet telemedicine is going to be a huge consumer trend over time not unlike what we have seen with other services like online and mobile food and delivery services.
Expect to see more innovations and product catalog extensions occur over the coming quarters that will deepen the benefit of our strategic pillars.
We have now been sharing our growth strategy with you for a little over a year and we are now starting to fill in the pieces to build an enduring profitable and growing pet health company.
Want to be Crystal clear on those measures during the last earnings call I called out the critical initiatives and key measures to watch as an indication of our turnaround those strategic initiatives. Our continued migration of our business to a recurring subscription model. We have seen rapid progress here and we'll continue to see more recurring business that enables pet meds.
To be a more predictable business model.
Telemedicine.
We see this as a major trend with their regulatory environment changing rapidly to allow pet parents get quality and affordable virtual care and medication delivered over any digital device.
Expansion of product catalogs and services there is a significant opportunity to incorporate a broader set of consumable products into our catalog.
Minutes will benefit by having more recurring and more regular visits over time and higher <unk> V. N. L. T V. Our customers want this wider selection from us and we're looking at opportunities to expand this capability rapidly.
Improvements in new customer growth.
As we expand our product catalog over the long term pet Med express will benefit from having a higher LTV and more operating leverage to acquire customers at scale.
Unique and differentiated services via digital based health care services, we have already talked about moving on line with our long term set of pet medications and veterinary care. We will continue to add more virtual care and wellness services that will contribute to a loyalty or less customer churn and uniqueness in the market.
In addition.
<unk> remains committed to pursuing acquisitions partner investments as well as strategic partnerships in order to accelerate our business transformation now I would like to have Christine review, our financials for the quarter.
Thanks, Matt.
I wanted to begin by saying that I'd love to my first 90 days here at patented.
I'm excited by the quality of our talent and passion, our teams have for our customers and their pet.
I'm very proud of our team's rapid response to hurricane Ian and the financial support we were able to provide to the Gulf Coast Humane Society, helping hundreds of pets that loss shelter during the disaster.
Our mission to ensure every pet lives, a long and happy life could not be more life.
Let me turn to our financial results for the quarter ending September 30 is 2022.
In fiscal quarter 2023.
My remarks will compare this year's quarterly results to the same quarter last year ending September 30th 2021.
For the current year second quarter sales were $65 4 million compared to the sales of $67 4 million in the same period last year, a decrease of 3%.
As Matt mentioned, we are closing the gap year over year.
Repeat sales of $59 7 million for the quarter decreased one 5% compared to the repeat sales of $60 6 million in the same period last year.
The continued growth of our Ultrashape and save sales as a percentage of total sales continues to drive greater engagement and recurring revenue, it's strengthening I'll repeat sales base.
As a percentage of sales.
<expletive> and Sage sales increased 15% sequentially from 39% in the quarter up from 34% in the prior question.
We also welcomed approximately 61000, new pet parents this quarter compared to 69000 in the prior cool with it.
Gross profit as a percentage of sales of 28.2% declined 20 basis points compared to the same quarter last year and modest decline year over year.
Net income was $2 6 million or 15 cents per diluted share for the second quarter of our fiscal year 2023.
<unk> to $6 3 million or 31 cents per diluted share for the same quarter last year.
Adjusted EBITDA for the quarter was $7 1 million compared to $9 8 million for the same quarter last year.
We had two noncash items in the quarter severance and the sales tax accrual.
These were adjusted out of EBITDA to provide them with relevant field operating performance.
On a combined basis. These adjustments accounted for approximately $1.3 million expense in the quarter and is shown as add backs to adjusted EBITDA.
In addition, Jeff.
At EBITDA add backs other noncash expenditures, including stock compensation interest income and expense income taxes, depreciation and amortization a full reconciliation can be found in our 10-Q.
G&A spend excluding the two noncash items that I, just mentioned increased 2.5 million year over year.
On a sequential basis G&A is relatively flat and continues to reflect the investments that are intentionally and strategically placed in support of our transformation and to fuel future growth.
Advertising spend for the quarter it was relatively flat year over year.
In the quarter ending September 30th 2022 we spent $1 $4 million on Capex expenditures at 900000 compared to last year with.
With the majority of our spend related to our e-commerce platform and our new data warehouse.
We expect to see continued investment in capital expenditures.
Around the same levels for the remainder of the fiscal year 'twenty to 'twenty three.
We had $96 5 million in cash and cash equivalents and 34 million in inventory with no debt as of September 32022.
The higher inventory levels at quarter end was the result of timing of inventory purchases.
And finally, the board approved a quarterly dividend of 50 cents per share on the company's common stock that will be paid on November 3rd. She is 2022 to shareholders of record at the close of business on November 18th 2022.
Please note that the declaration and payment of future dividends is discretionary and will be subject to a determination by the board of directors each quarter.
I will now turn the call back over to map for closing remarks.
Thanks, Christine we've made substantial and measurable progress on our business transformation over the last several quarters and remain laser focused on execution.
<unk> has a strong market position and balance sheet.
Basis for growth for this business transformation.
As we have repeatedly said over the last several quarters pet meds is pursuing a vertical specialty retailer strategy.
We aim to be pet parents trusted pet health expert as previously mentioned there are four strategic pillars that are critical to executing this strategy.
Now that we have the majority of the new people process and strategic elements of the business. We expect to deepen these four strategic pillars and focus on laser beam execution. This ends our prepared remarks, operator, we are now ready to take questions.
Yeah.
Thank you Joe.
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Our first question comes from colleague Grundy with Jefferies. Please go ahead.
Hey, Thanks for taking my question. So I wanted to ask about your new initiatives to expand customer LTV.
So you saw a nice pickup in auto ship penetration and Youre building out assortment on the nutrition side, but maybe talk about how youre thinking about the rest of 2023 and then the milestones we should be watching as here for instance building on nutrition.
Thanks for the question Cory This is Matt I'll take this and Christine feel free to jump in yeah. If you think about that slide where we had the.
Four of the five pause we're gonna go very deep on the assortment piece that we've mentioned.
Right now Youll see.
Our LTV has been a relatively stable on CAC has increased year over year, primarily due to competitive pressures.
We changed our mix considerably and continuing to test and learn but really what we see as an opportunity is to be much more of a.
Broader merchandiser of products outside of medication protocol and so the things to look forward. There are you know LTV to CAC growing and I think look for that LTV number to grow we've talked about a 1.5 LTV to CAC look forward that LTV to increase especially helpful. As LTV incorporates more.
Auto ship orders on the consumable side, we'll be spending a lot more time in the coming quarters, expanding particularly food. We have added some big brands already now the company is in early innings on getting good at selling non medication products. So look for that LTV expansion sticking with that 1.5 ltvs.
Cap is a metric or better and expanding our lines into food does that answer your question Corey.
It does that's helpful.
Yeah.
And then for my second question I, just wanted to follow up on the testing and learning phase on AD spend so I know you're testing them more.
I guess like diversified approach compared to 10 minutes historical focus more on bottom of the funnel marketing.
But where are you in that process and how are you thinking about AD spend for the rest of the year.
Especially with.
LTV to CAC above your target range this quarter.
Yeah, Great question, so we swung to a little bit more efficient than we were in the previous quarter previous quarter was at 1.6 LTV to CAC and we spent more in marketing as well.
This quarter is 2.1.
And it's highly highly fluctuating and highly variable based on what we're seeing in the market.
Our advertising spend was about flat year over year, I was kind of lower double digits and what we're trying to do is figure out that right push pull between getting awareness marketing and performance marketing to work.
I would have is continued to focus on that I think we're seeing some things that are good early indicators that we can start scaling but.
We're gonna be very rigorous around being efficient not being an unprofitable marketer and really making sure that the assortment and then the marketing really start powering that LTV to CAC. The way we want to at scale I mean, right now I think you've seen us pretty much saying to investors and analysts that we.
We've been flat year over year in terms of how we've been thinking about the spend but I'm, hoping that we can break that trend and start scaling that spend over time as performance comes in on these initiatives.
Very helpful. Thank you.
Thank you.
Next question comes from Anthony Disney T with Sidoti and co. Please go ahead.
Hi, good afternoon, and thank you for taking the question so.
In terms of the expanded product selection.
You've talked about wanting to increase obviously the frequency of when customers purchase from your side.
Can you share with US maybe you know as to whats your goal in terms of SK, usually when they get to or are you sort of quantify a metric like that you mentioned also that you have more foods now are as.
Will those be also drop shipped from the manufacturers or will you take any inventory into your warehouse how should we think about that.
Yeah. That's a great question you know we don't have a SKU goal per say, we have a number of brands that we've been working with them and targeting to bring in some of which we have already and some of which are in our pipeline and quite frankly. This is this is new muscle for the company. We just haven't been a company that has been particularly good at selling.
Our products other than medication.
It's a big initiative for us and we've actually have some new hires that are specifically just focused on this.
We're looking at a bunch of different options through distribution is clearly an option that we have and we do today.
But we're also looking at selective buys that we inventory as well. So again no real metric that you can put into a model per se until we roll this out or skus, but we'd like to have the top premium brands, because we're known as a premium brand of pet health care provider I don't see us as being the largest assortment of food, but we pick the most.
Premium brands and working with them and they're very bespoke way and again early innings on us getting good at that but we're very focused on it.
Got it Okay, and then just wondering as far as the advertising spending.
Just wondering if the political ad campaigning.
Is that.
Perhaps a prohibited you from being as cost.
Cost effective as you would like.
Now how does the impact on your ability to advertise efficiently.
Oh interesting question, we haven't seen an impact on that but you know typically the quarter that we're in now that.
But I'm not going to guide to obviously is our one of our slower ones because of the seasonality related to flea and tick and heartworm flea and tick and heartworm being the biggest concentration of where we sell our products. So this isn't typically a big quarter for us and we don't have unfortunately, a huge assortment of non medication products.
So for us to be honest, it's not a big quarter in terms of blood.
Black Friday sales and things that you can see another common retailers in terms of the competitive environment for those types of products that we sell today don't see an impact.
But I would imagine we would as we start growing our assortment and start competing with kind of broader media campaigns in the market, but it's an interesting question I haven't seen that for our business.
Okay. That's good to hear and then.
Lastly for me as far as G&A expenses, it looks like even backing out the severance charge. It looks like G&A expenses were up almost 50% on a year over year basis.
How should we think about the rate of expense growth going forward here.
Yeah, No. That's a great question, Anthony I'll hand, this off to Christine.
Yeah. Thanks, Anthony for the question, So I think like I've mentioned.
Strategically put investment into G&A expenses into people into and some of our software and data analytics for it to be getting data better data for it to be getting better insights and yeah. I think we've been very intentional and strategic about.
That I think sequentially.
It's relatively flat, but to your point year over year, excluding those one times I think as I mentioned DNA was up about two and a half million so up year over year, but sequentially sequentially and relatively flat.
And we're probably lean into that and you know as we.
Let's go into this quarter in the next quarter, we do believe that as part of our transformation and will fuel growth in the future and all I can add a little bit more color to that Anthony is.
You know for a relatively large.
Retailer, we had a very small and we don't break out where are our G&A investments are better just gave you a little color that'd be helpful. In a very extremely small already almost nascent R&D department. When we when I first started and now we actually have a relatively large team that focuses on data science and also <unk>.
Has the ability to quickly rollout changes a b testing optimization. So I think some of these G&A investments the way I think about them and frame them. In addition to what Christine said is we're getting the business to a place where we can start acting like a very agile and dynamic retailer and so these were very kind of.
Almost toolbox similar toolbox elements of investment for this type of business and we're feeling really good about the team. We're feeling really good about how we built the team underneath some of these executives that we've hired and they're really necessary investments. So that we can really turn this business into a growth company I just wanted to add a couple of pieces of color to the question.
Anthony.
Okay. Thank you and best of luck.
Thank you. Thank you. Thank you very much.
Again, if you would like to ask a question. Please press star one on your telephone keypad.
Our question and answer portion of the call has ended.
I'd like to turn the conference over to Matt Hill at the company CEO for closing remarks.
Thank you operator thank.
Thank you for joining our call today I'm confident that the future we envision for pet meds, along with the foundation that we've been laying well meet the market opportunity and unique and innovative ways and will lead to increased operating results and shareholder value.
Pet Meds brand expertise and reputation are unparalleled our balance sheet is strong our team is fantastic I am more excited about the future than ever. Thank you for your continued support.
The conference has now concluded. Thank you for your participation you may now disconnect.
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