EX-99.1 2 form8k-oct23ex991cc.txt EXHIBIT 99.1 PETMED EXPRESS, INC. QUARTER ENDED SEPTEMBER 30, 2006 CONFERENCE CALL TRANSCRIPT OCTOBER 23, 2006 AT 8:30 A.M. EDT Coordinator: Welcome to the PetMed Express Inc. doing business as 1-800-PetMeds conference call, to review the financial results for the second fiscal quarter ended on September 30, 2006. At the request of the company, this conference call is being recorded. Founded in 1996, 1-800- PetMeds is America's Largest Pet Pharmacy, delivering prescription and non-prescription pet medications and other health products for dogs, cats and horses direct to the consumer. 1-800- PetMeds markets its products through national television, on-line, direct mail and print advertising campaigns, which direct consumers to order by phone or on the Internet, and aim to increase the recognition of the "1-800-PetMeds" brand name. 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 now like to turn the call over to the company's Chief Financial Officer, Mr. Bruce Rosenbloom. Bruce Rosenbloom: Thank you. I'd like to welcome everybody here today. Before I turn the call over to Mendo Akdag, our Chief Executive Officer and President, I would like to remind everyone that the first portion of this conference call will be listen- only, until the question and answer session, which will be later in the call. Also certain information that will be included in this press conference may include forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, or the Securities and Exchange Commission that may involve a number of risks and uncertainties. These statements are based on our beliefs, as well as assumptions we have used based upon information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties and assumptions. Actual future results may vary significantly based on a number of factors that may cause the actual results or events to be materially different from future results, performance, or achievements expressed or implied by these statements. We have identified various risk factors associated with our operations in our most recent annual report and other filings of the Securities and Exchange Commission. Now let me introduce today's speaker, Mendo Akdag, the Chief Executive Officer and President of 1-800-PetMeds. Mendo. Mendo Akdag: Thank you, Bruce. Welcome everyone, and thank you for joining us. Today we'll review the highlights of our financial results. We'll compare our second fiscal quarter and six months ended on September 30, 2006, to last year's quarter and six months ended on September 30, 2005. Exhibit 99.1 Page 1 - 7 For the second fiscal quarter ended on September 30, 2006, our sales were $43.8 million compared to sales of $38.7 million for the same period the prior year - an increase of 13%. For the six months ended on September 30, 2006, sales were $94.5 million compared to sales of $82.3 million for the six months the prior year - an increase of 15%. The increase was primarily due to increased retail reorders, offset by decreased wholesale sales. For the second fiscal quarter, net income was $3.3 million, or 14 cents diluted per share, compared to $2.7 million or 11 cents diluted per share for the same quarter the prior year - an increase to net income of 22%. For the six months, net income was $8.1 million, or 33 cents diluted per share, compared to $6.3 million, or 26 cents diluted per share a year ago - an increase to net income of 29%. Retail reorder sales increased by 23% to $28.1 million for the quarter, compared to retail reorder sales of $22.9 million for the same quarter the prior year. For the six months, the reorder sales increased by 28% to $62 million, compared to $48.6 million for the same period last year. Retail new order sales increased by 6% to $15.5 million for the quarter, compared to $14.7 million for the same period the prior year. For the six months, the new order sales increased by 3% to $32 million, compared to $31.1 million for the same period last year. The slowdown in retail new order sales growth may be attributable to increased advertising costs to acquire new customers, and increased price competition. Wholesale sales were approximately $200,000 for the quarter compared to $1.1 million for the same quarter the prior year. For the six months, wholesale sales were approximately $500,000 compared to $2.5 million for the same period a year ago. The decrease was due to our decision to limit wholesale sales to focus on retail business. We acquired 212,000 new customers in our second fiscal quarter compared to 208,000 for the same period the prior year, and we acquired 419,000 new customers in the six months compared to 425,000 for the same period a year ago. Our average retail order was approximately $77 for the quarter compared to $74 for the same quarter the prior year, and approximately 62% of our sales were generated on our web site for the quarter compared to 55% for the same period the prior year. The seasonality in our business is due to the proportion of flea, tick, and heartworm medications in our product mix. Spring and summer are considered peak seasons, with fall and winter being the off seasons. Exhibit 99.1 Page 2 - 7 For the second fiscal quarter our gross profit as a percent of sales was 38.6% compared to 38.4% for the same period a year ago. For the six months, our gross profit as a percent of sales was 39.2% compared to 38.5% for the six months a year ago. The percentage increase can mainly be attributed to decreases in wholesale sales, which have lower gross profit margins. Our general and administrative expenses as a percent of sales were approximately 9.9% for both the second fiscal quarter and for the same quarter the prior year, and the G&A expenses as a percent of sales were 9.3% for both the six months and the September 30, 2006, and for the same six months the prior year. The company adapted financial accounting standard 123R on April 1, 2006, resulting in approximately $223,000 of stock option compensation expense for the quarter, and $446,000 for the six months, which increased the G&A as a percent of sales by 1/2% for the quarter and the six months. For the quarter we spent $7.7 million in advertising compared to $6.9 million for the same quarter the prior year - an increase of 11%. For the six months we spent $16 million in advertising compared to $14.5 million a year ago - an increase of 10%. Advertising cost of acquiring a customer for the quarter was $36 compared to $33 for the same quarter the prior year, and for the six months it was $38 compared to $34 for the same period a year ago. Our working capital increased by $8.9 million to $43.9 million since March 31, 2006. The increase can mainly be attributed to cash flow generated from operations. We had $37.7 million in cash and $9.9 million in inventory, with no debt as of September 30, 2006. Net cash from operations for the six months was $14.2 million compared to $12.7 million for the same period the prior year - an increase of $1.5 million. Capital expenditures for the six months were approximately $300,000. This ends the financial review. Operator, we are ready to take questions. Coordinator: All right, very good now. We will now begin the question and answer session. If anybody would like to ask a question, please press star 1 on your telephone keypad. To cancel your request, press star 2. If you're on speakerphone equipment, you may need to lift your telephone receiver before making your selection. One moment please for the first question to queue up. Our first question comes from Frank Gristina of Avondale. Go ahead with your question please. Frank Gristina: Good morning Mendo, Bruce. Mendo Akdag: Good morning, Frank. Exhibit 99.1 Page 3 - 7 Frank Gristina: Bruce, I was hoping you could break out the different revenue lines, new reorder, wholesales, just so - cause on the surface it seems like maybe the new order business was down, but it's actually the wholesale business that caused the year-over-year decline in the, I guess, the delta between total revenue and reorder revenue? Bruce Rosenbloom: On total sales for the quarter? Frank Gristina: Yes please. Bruce Rosenbloom: The new orders were $15.5 million, reorders $28.1, wholesale was approximately $200,000. Frank Gristina: Two hundred thousand. And then in terms of - can you give us an update what's going on in the advertising environment? Do you feel like you felt - I mean $36 CAC [customer acquisition cost], 8% inflation is not too bad. Do you feel like you saw some political pressure there or how did you manage to, I guess, keep that inflation down to single digits? Mendo Akdag: It was really not as bad as we anticipated, the bottom line answer is. Frank Gristina: And is it dissipating now, or I guess through November we'll see, I guess, what pressure an ad... Mendo Akdag: It was not bad the first two weeks of October, obviously we have two more weeks to go. So it may tighten up a little bit. Frank Gristina: Okay. Mendo Akdag: But bear in mind that it's our off season. Frank Gristina: Okay, and the last thing is what's the driver of retail reorder sales, so up 23%? Is it new products in the basket, is it some pricing? What's driving that strong number? Mendo Akdag: Continuous communication with our database. Frank Gristina: Do a lot of direct marketing via email? Mendo Akdag: Refills, upsells, and cross-selling, and through both emails and direct mail. Frank Gristina: And cross-selling, what exactly - does that mean you were getting them to buy a new product, something they didn't buy before so they're going from Frontline and Heartgard to a bone and joint medicine? Is that cross-selling? Mendo Akdag: I would say so, but more vitamins, nutritional supplements, toys, shampoo, conditioner, skin care. Frank Gristina: Great. Well thanks a lot. I'll get back in the queue. Exhibit 99.1 Page 4 - 7 Mendo Akdag: Okay. Coordinator: Next question comes from Marcos Kaminis of Kaminis Capital. Marcos Kaminis: Hi, I have a couple - two questions. First question is regarding the wholesale business. I'm sorry I missed the prior year number for that. Mendo Akdag: The prior year for the quarter was $1.1 million, and the current September quarter was $200,000. Marcos Kaminis: Okay. So is this a run rate, this $200,000 level that you're going to probably stick with? And when will the comp number start to reflect the - when will this be out of your comps? Mendo Akdag: I think by next fiscal year it should be out of the comps. Marcos Kaminis: You've now - let's see. It affected last quarter, it affected this quarter, is it going to affect the coming quarter? Mendo Akdag: Hold on one second. Possibly yes. It will. Marcos Kaminis: Okay so, I mean when did you start it? Mendo Akdag: As of the end of the March quarter. So we have two more quarters to go that it will impact it. After that it will be... Marcos Kaminis: That's helpful. I mean I feel like it's an economic value ad anyway, in the long run. The other question I have now is what are your plans for the use of cash? You have a nice cash store building up. You have a share repurchase plan - pretty large share repurchase plan passed through the Board. And are you thinking you might acquire smaller competitors, or are you going to buy back shares? What's your plan? Mendo Akdag: We do not have a stock buy-back plan approved by the Board. Marcos Kaminis: You don't? Mendo Akdag: That's not us. Marcos Kaminis: Would you consider buying back shares? Are you planning to maybe buy up some lists of some smaller competitors? Mendo Akdag: The board is considering all options, including stock buy-back, dividends and acquisitions, so when and if the board makes the decision, obviously we'll let the public know. Marcos Kaminis: Right, but, you know, what do you view as more valuable? Mendo Akdag: To me, personally? Exhibit 99.1 Page 5 - 7 Marcos Kaminis: Yes. Mendo Akdag: Probably stock buy-back. Marcos Kaminis:Okay, thank you. Mendo Akdag: You're welcome. Coordinator: Next question comes from Anthony Lebczinski of Sidoti and Company. Anthony Lebczinski: Good morning, a couple of questions. Have you made any changes to the advertising strategy, and also is the mix of cable TV commercials still the same, or are you doing a little bit more of perhaps online advertising? Mendo Akdag: We are probably doing a little bit more online advertising. We really have not made any strategic changes except probably our creatives. We're coming out with new creatives which will probably start running in January that we're excited about. Other than that, we track all our advertising and whatever is obviously paying off we'll continue with that. Anthony Lebczinski: Um, hmmm. And as far as the gross margin, you had mentioned that the bulk of it, that the gross margin expansion was because of the wholesale revenue coming down and now as you strip out the wholesale component, what was the gross margin then? Mendo Akdag: It was very similar to last year, probably a .1% difference. Anthony Lebczinski: Okay, and lastly, as far as the average order size, it did increase this quarter versus last year. What would you attribute that to? Mendo Akdag: I would say about 60% is due to price increases, passing the cost increases to the consumer, and the other 40% upselling and cross-selling. Anthony Lebczinski: Okay, thank you. Mendo Akdag: You're welcome. Coordinator: Once again, if anybody would like to ask a question, that's star 1 on your telephone keypad. Star 1 on your telephone keypad if you'd like to ask a question. Our next question comes from Kristine Koerber of JMP. Go ahead please. Kristine Koerber: Yeah, hi. Can you give us a little more color on pricing? I know you said you were competitive on pricing during the quarter, what you're seeing out there, and what you saw in the environment during the quarter. Are we seeing more competitors heating up the discounting? Mendo Akdag: We really look at veterinarians. The market share is coming from the veterinarians so we compare ourselves to veterinarians and they have been more price-competitive. Exhibit 99.1 Page 6 - 7 Kristine Koerber: Has it been a lot? Are we talking 5%, 10%? How much more aggressive were you during the quarter? Mendo Akdag: It's a highly fragmented market. There are about 20,000 veterinary practices, so there are a lot of prices out there. On average what we charge - on average we save the consumer about 10% to 15% I would say. But bear in mind that we have free shipping - free priority shipping we offer on orders over $39, which majority of the orders qualify. Kristine Koerber: Okay, thanks. Coordinator: Next question comes from Michael Friedman of Noble Financial. Michael Friedman: Yes, actually most of my questions have been answered. Just a question on the inventory, actually. Is there - are you finding it easier, or harder to get inventory, or about the same? Can you just give us a little color on that? Mendo Akdag: I would say it's about the same. It has not changed. Michael Friedman: Thank you. Mendo Akdag: You're welcome. Coordinator: Once again, that's star 1 on your telephone keypad if anybody would like to ask a question. Star 1 on your telephone keypad. That's star 1 on your telephone keypad if anybody would like to ask a question. All right, we're showing no further questions on the phone line. We'll turn it back over to you, sir, for further comments. Mendo Akdag: Thank you. We'll be focusing our efforts in three areas, to capitalize on the pet industry's growth trend. One, optimizing our advertising media buys and creatives to capture additional market shares; two, personalized communication and health education content to build value for our customers, to increase loyalty, and to differentiate our brand, and help our customers choose the right products for their pets' conditions; and three, improving our current service levels. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call. Coordinator: Very good. Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect at this time. Exhibit 99.1 Page 7 - 7