EXHIBIT 99.1
PETMED EXPRESS, INC. CONFERENCE CALL
SECOND QUARTER FINANCIAL RESULTS
November 10, 2003
5:00 p.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 quarter ended
September 30, 2003. 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 medications, along with health and
nutritional supplements for dogs and cats, direct to
the consumer. 1-800-PetMeds markets its products
through national television, on line, and direct
mail advertising campaigns, which direct the
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'd like to turn the call over to the
company's Chief Financial Officer, Mr. Bruce
Rosenbloom. Sir, you may begin.
B. Rosenbloom Thank you. I'd like to welcome everyone here
today. Before I turn the call over to Mendo, I want
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 release 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 in our most recent annual report and
other filings with the Securities & Exchange
Commission.
Now, let me introduce today's speaker, Mendo Akdag,
the Chief Executive Officer of 1-800-PetMeds.
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M. Akdag Thanks. Thank you, Bruce. Welcome, everyone. We
will first review the highlights of our financial
results. We'll compare our second fiscal quarter
and six months ended September 30, 2003 to last
year's quarter and six months ended September 30,
2002.
For our second fiscal quarter ended on September 30,
2003, our sales were $25 million, compared to sales
of $14.2 million for the same period the prior year.
This was a 76% increase in sales. For the six
months, sales were $55.4 million, compared to $29.1
million for the same period the prior year, an
increase of 91%. The increase was primarily due to
increased reorders and increased advertising, which
was boosted by our free shipping promotion.
For the second fiscal quarter, our net income was
$1.8 million, $0.8 diluted per share, compared to
$200,000 and $0.01 diluted per share a year ago, an
increase of 787%. For the six months, our net
income was $3.3 million, $0.14 diluted per share,
compared to $1.1 million or $0.05 diluted per share
a year ago, an increase of 194%.
We acquired 166,000 new customers in our second
fiscal quarter compared to 114,000 for the same
period a year ago, and we acquired 400,000 new
customers in six months, compared to 235,000 for the
same period a year ago.
Our reorder sales increased by 103% to $12.9 million
for the quarter, compared to reorder sales of $6.4
million for the same quarter a year ago. For the
six months, our reorder sales increased by 110% to
$25.4 million, compared to $12.1 million for the
same period a year ago.
There is seasonality in our business due to flea,
tick, and heartworm medications that we sell. Our
second fiscal quarter was our second best season.
For the second fiscal quarter, our gross profit, as
a percent of sales, was 41%, compared to 44% for the
same period a year ago. For the six months, our
gross profit, as a percent of sales was 40%,
compared to 43% a year ago. The decrease was mainly
due to our free shipping promotion, which a portion
of it was offset by increases to our product
pricing.
Our general and administrative expenses, as a
percent of sales, decreased to 11% for the quarter,
compared to 14% for the same quarter a year ago.
For the six months, the G&A decreased to 10%,
compared to 14% a year ago. The improvement was due
to economies of scale gained with increased sales,
and also almost 50% of our customers placed their
order on our Web site, compared to 40% for the same
period the prior year. Sales per employee increased
by approximately 52%.
We spent $4.5 million in advertising for the
quarter, compared to $3.8 million for the same
quarter a year ago. For the six months, we spent
$11 million for advertising, compared to $6.6
million a year ago. Our cost of acquiring a
customer for the quarter was $27, compared to $33
for the same quarter a year ago. For the six
months, it was $27 compared to $28 for the same
period a year ago.
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Our working capital increased by $5 million to $8.1
million since March 31, 2003, our fiscal year end
and our net worth increased by $5 million to $10.5
million at the same time period. Both increases
were due to an increase in net income and also the
exercise of stock options. Overall, we're very
pleased with our financial results.
I want to make a few other points. We launched a
new advertising campaign for the fall and winter
season in October. If you have not seen it already,
you can view the new commercial on our Web site.
We increased our credit line from $2 million to $5
million. We are fine-tuning our warehouse to
increase our fulfillment capacity from 10,000 orders
a day to approximately 13,000 to 15,000 orders a day
to prepare for our next peak season.
Listing on a major exchange is a key focus for us,
and we'll update you when something definite takes
place.
Operator, we are ready to take questions.
Coordinator Thank you, sir. Our first question is from Michael
Chapman of Lee Munder Capital.
M. Chapman Nice quarter. I have a couple of related questions.
I'm trying to ascertain a forward revenue growth
rate. Are there different statistics you could
provide us as far as the effectiveness of a dollar
spent on advertising as it relates to new customer
ads? Secondly, the rate reorder, proportionately
with new customers, if that figure has been changing
or improving over time, and what you're predicting
for reorder rates going into next fiscal year.
Thank you.
M. Akdag Thank you, Michael. First of all, we don't have any
guidance out there, but I will give you some
historical numbers. As I've pointed out, for the
six months, the cost of acquiring a customer was $27
compared to $28 for the same period a year ago, so
it was pretty consistent, also taking into
consideration that we spent a lot more money for the
last six months from the prior year.
As far as reorders are concerned, how we measure
that is we compare the reorders as a percent of
prior year sales. If you look at our quarter ending
September 30th, we did $12.9 million in reorder
sales and we look at the correlation with the total
sales for the same period prior year, which, I
believe, was about $14.2 million, so $12.9 million
compared to $14.2 million, $12.9 million in reorders
is about 91% reorder rate as a percent of prior
quarter sales. Now that percentage for the last
quarter was about 84% and that percentage for the
last fiscal year was about 81% to 82%, so it has
improved, to answer your question.
M. Chapman A second related question: The relative pricing on
both the nutrients and the prescriptions that your
customers order, how do they compare to doing it
locally at a veterinarian?
M. Akdag According to our surveys with the customers, first
of all, there are 30,000 veterinarians in the United
States, so it's a highly fragmented market.
Potentially, there can be 30,000 different prices
out there. We conduct surveys for both
veterinarians and customers. We believe, on
average, we save the consumer up to 25% from
veterinarians' prices.
99.1 page 3 - 9
M. Chapman Thank you.
Coordinator Our next question is from Zack Mackadoo with MCM
Associates.
Z. Mackadoo Just to follow up on the reorder question, if the
reorder rate is 91%, does that imply that the
customer retention is 91%?
M. Akdag No. That's in dollars, so there could be a variety
of things in place. One of them could be the same
customer could be ordering more than once, or could
be ordering more within an order than the prior
year. To answer your question, no, but that's the
correlation we measure is reorders as a percent of
prior period sales.
Z. Mackadoo So is the number of purchases per year per customer
going up or down?
M. Akdag It is pretty consistent. It is about 1.3 times. It
averages about 1.3 times per year.
Z. Mackadoo Yes. I thought that advertising spending was a
little lower than I was expecting, which made it a
lower percentage of sales. What was the reason for
that?
M. Akdag It is going to fluctuate. We have, what I would
say, flexible budgets. Depending on the success of
our advertising, it could change. We typically
budget about 20% of sales, but it will be plus or
minus 10%. As you know, last quarter it was 22%, so
it was probably higher than you expected.
Z. Mackadoo Yes.
M. Akdag It will fluctuate. It was a little tight. We buy
remnant space, so we don't always clear, depending
on the advertising industry, such as like there were
recall elections in California. That type of stuff
impacts us, and it was tight last quarter, so we did
not clear as much as we anticipated on TV.
Z. Mackadoo Yes. Have you made any progress on getting a NASDAQ
listing, or can you give us an update?
M. Akdag I really don't like talking about it until something
definitive takes place, so I can assure you that
it's a primary focus of ours, but I don't want to
speculate on it. Once something definitive takes
place, obviously we'll let the public know.
Z. Mackadoo Thanks.
M. Akdag You're welcome.
Coordinator Our next question is from Penny Field with Global
Financial Group.
P. Field The balance sheet looks terrific. Your liquidity
and book value were just a real refreshing note on
the balance sheet, so congratulations on getting all
that in line.
M. Akdag Thank you.
P. Field On your advertising mix coming up, can you talk a
little bit about how you've changed that ad mix in
terms of your opportunistic buys - I've noticed some
changes there - and whether or not you're going to
continue with the shipping promotion for the time
being?
99.1 page 4 - 9
M. Akdag I'll answer your last question first. We will
continue with our free shipping promotion for the
time being. As far as advertising is concerned, we
test all the time. Obviously we will spend the
money on whatever is the most efficient. Our mix is
changing a little bit. It was primarily television
in the past. We'll mix it up. You will see both
television and print advertising going forward.
P. Field Great. I notice you talked a little bit in your
filing about some cap ex that you were going to
budget in to do some additional expansion. How much
of that do you expect to capitalize? It was, I
think, computers and the warehouse.
M. Akdag All of it will be capitalized.
P. Field All right. Can you talk a little bit about the
status of the remainder of your NOL?
M. Akdag I'm sorry. What?
P. Field The NOL carry-forward.
M. Akdag Operating loss carry-forward?
P. Field Yes. I'm sorry.
M. Akdag It's limited really what we can use. I think,
Bruce, what is it?
B. Rosenbloom Two hundred and sixty-six thousand dollars a
year.
M. Akdag Two hundred and sixty-six thousand dollars a year is
what we can use up to, I think, it goes -.
B. Rosenbloom For the next 14 to 15 years.
M. Akdag The next 14 years.
B. Rosenbloom As long as we continue to be profitable.
P. Field Perfect. Good. Thank you very much.
B. Rosenbloom Thank you.
M. Akdag Thank you.
Coordinator Our next question is from David Santa, a private
investor.
D. Santa Congratulations, guys. A couple of things: How do
you handle the seasonal fluctuations in terms of the
workforce?
M. Akdag That's an excellent question. Since we have a call
center - it's probably a better word to use
communication center now since they also handle e-
mails and live chats, etc. - there is a natural
turnover in that type of environment, so obviously
we don't hire when we're off-season. It kind of
takes care of itself because there's a natural
turnover in the environment that we are in.
D. Santa I see. I wanted to ask about the warehouse
expansion. You mentioned you're going to up the
capacity from 10,000 orders per day to 14,000. What
did you base that on?
99.1 page 5- 9
M. Akdag We not as efficient on picking slow-moving items and
we're fine-tuning it to make it more efficient to
pick slow movers. On our fast and medium movers, we
use.
D. Santa Meaning to eliminate? I'm sorry. When you say,
picking, to eliminate the SKU?
M. Akdag No. What we do is we use Pick to Light, which is
very efficient and accurate, to pick fast movers and
medium movers. We don't do that with our slow
movers. What we're really doing is bringing our
slow movers with our volume increasing are becoming
like medium movers now. We're going to start
picking our slow movers with Pick to Light. That's
what we're working on. That will increase our
capacity. Did I answer your question?
D. Santa Yes. So it's not necessarily related to any
projected increase in sales?
M. Akdag We're preparing for our next peak season, but, as I
said, I don't have any guidance out there, so I
can't help you with that.
D. Santa That's fine. Can you talk about what you see as a
competitive environment right now? Who's out there
trying to do the same thing that PetMed is doing?
M. Akdag We still hear the veterinarians are our main
competition. That's what we hear from our customer
base or potential customers that contact us. There
are about a dozen to two dozen companies on the
Internet, on-line companies. They're privately
held. We don't have any financial information on
them, but, based on their advertising activities,
our guess is that they're not big. That's really
all I can tell you, so there's no major competition
in our category at this time. It's really we're
competing with veterinarians.
D. Santa Then I know you don't want to talk about the
listing, but is there something you can say as to
why it's taken as long as it's taking?
M. Akdag We just qualified, we believe, on the quantitative
requirements, I believe on November 7th, so you
can't really apply without qualifying. It depends
on which exchange we apply. I hope that answers
your question.
D. Santa No. It does. Thank you very much. Just one last
thing, its mixed feelings being a stockholder, but
you might want to give Bruce a raise here so he
stops selling his shares.
M. Akdag Is he selling? I don't know.
D. Santa It's not a lot, but keep the troops.
M. Akdag We have, really, if you look at our cash
compensation of the management, its low. We are
highly compensated with stock options and there is a
demand for our stock.
D. Santa Right.
M. Akdag I think it's good that insiders are satisfying some
of the demand, which increases the float, which
creates a more efficient market.
D. Santa Sure. It's been impressive, from my perspective.
Can you talk at all about what Tricon's intentions
are moving forward? Is the view now to hold off on
sales until the listing comes? Is that a question
you can answer?
99.1 page 6 - 9
M. Akdag I don't know the answer to that. My guess is
probably, but all their sales they did not sell, as
far as I know, any in the open market. It's all
been orchestrated sales.
D. Santa Right. Just the last thing about the credit line,
why was that increased and how do you anticipate
using that?
M. Akdag We anticipate an increase in our inventory,
preparing for the peak season. We may need it. We
may not need it. It's good to have it.
D. Santa Right. Thank you very much. Keep up the great
work.
M. Akdag Thank you.
Coordinator We have a follow-up question from Michael Chapman
with Lee Munder Capital.
M. Chapman Yes. Gentlemen, I could probably figure this out
roughly, looking back over several quarters, but
freight, as a fraction of your revenues back before
the promotion, what does that run typically?
M. Akdag I'm sorry. I don't understand your question.
M. Chapman Freight expense, shipping expense.
M. Akdag Freight, our cost or what we charge the customer?
M. Chapman What the customer is charged.
M. Akdag We used to collect about 7% on freight as a revenue.
With our free shipping, which is on orders over $49,
we're charging the consumer about one percent now,
one to 1.5%. To answer your question, we lost 6% on
the free shipping promotion. We made 3% of that by
increasing our product pricing, so in that we lost
3% of our gross margin.
M. Chapman So it was all priced in the 3% recovery, not any mix
shifts to more profitable items?
M. Akdag Not really, no. Our mix is still about the same.
M. Chapman Do you use paid search advertising on the Internet?
Have you found that effective?
M. Akdag We use keyword searches. Yes. It is very
effective.
M. Chapman Lastly, relative to the large chains, is there any
scuttlebutt that perhaps they're looking at this
Internet channel, or do they have an existing
presence? Thank you.
M. Akdag The large chains, the PETCOs and the PETsMARTs, some
of their stores do carry over-the-counter items.
I'm not sure about their own line. We don't come
across much competition from them. They do not have
pharmacy licenses, so they do not carry, as far as I
know, prescription medication.
M. Chapman Thank you.
M. Akdag You're welcome.
Coordinator Our next question is from Dennis Johnson, a private
investor.
99.1 page 7 - 9
D. Johnson I'm wondering, how many options are currently
outstanding and what is the issue rate for options?
In other words, what kind of dilution factor can we
be looking forward to as we move through the next
year or two?
M. Akdag I believe there are about 4.5 million options and
warrants outstanding.
D. Johnson Are you going to be continuing to issue or is that
pretty much a done thing?
M. Akdag There will be some issues for management, but I do
not expect them to be huge numbers.
D. Johnson Great. Thank you.
M. Akdag Bruce is not happy about that.
D. Johnson Thank you.
M. Akdag You're welcome.
Coordinator The next question is from Tommy Lowack, a private
investor.
T. Lowack Yes. Congratulations, guys, on a great quarter. I
wanted to go back to the key question around
competition. I've talked to many friends and
customers of PetMed. Some of what I hear, which is
a concern being an individual investor, is many of
the vet offices simply offering to match price
through PetMed via the customer simply mentioning
that they want to get a prescription or that they
will acquire the medication through PetMed. What is
it that the company is doing to address that
concern?
M. Akdag Two things: One is convenience is just as important
for our customers as the price. The second is what
we do is, for our existing customers, we keep their
pricing even if there's a price increase, which
manufacturers will increase the cost just about once
a year. When we have a product price increase, we
don't pass that to our existing customers. We keep
their prices the same. Thirdly, that's why we came
up with the free shipping promotion over orders $49,
exactly the reason you just brought up.
T. Lowack Do you feel that the cost that you incur on the
medicine is at the same rate or less expensive than
what a veterinarian's office is incurring?
M. Akdag On average, I would say probably it's about the
same. The reason is we buy on promotions, most of
it.
T. Lowack Great. Thank you very much.
M. Akdag You're welcome.
Coordinator Our next question is from Ian Smith with Allen &
Company.
I. Smith Yes. What's the approximate breakdown in sales
between prescription and non-prescription sales and
what are the gross revenue implications of a
prescription versus non-prescription sales?
M. Akdag Prescriptions are about 28% of the sales and over-
the-counter is about 72%. Prescriptions have about
5% higher gross margins, gross profit margins than
over-the-counter - some over-the-counter, I should
say. When I say over-the-counter, I'm talking about
flea and tick medication. When you get into health
and nutritional supplements or shampoos, that kind
of products, the gross profits are very high.
99.1 page 8 - 9
I. Smith Do you view the risks from these Canadian - you can
find these Canadian pet pharmacy selling
prescription drugs at significant discounts, just
like they do for humans. Is that a significant risk
to your business?
M. Akdag Not at this time. We have not come across it. I
know it's there for human drugs. There are a few
Canadian sites for pet medications. They don't
carry everything. It's very limited. It's really
illegal, so there is going to be some, probably,
actions by either FDA or state or Canada itself,
probably, my guess is, to stop it.
I. Smith It's illegal for pet owners as well? I'm sorry to
interrupt.
M. Akdag Yes. It's a prescription medication just like human
prescription items.
I. Smith I see. Thank you.
M. Akdag You're welcome.
Coordinator We have a follow-up question from David Santa, a
private investor.
D. Santa Just about the competitive situation and
veterinarians offering to match the price, what was
the experience in the contact lens business when
that was in its recent stage? Weren't there similar
concerns and similar issues?
M. Akdag Yes, there was, and it was really a minority in the
contact lens industry and the
optometrist/ophthalmologist. It was a minority of
the eye doctors who were matching the prices. There
is still, obviously, a mail order category in the
contact lens industry. It's probably about 15% to
20% of the market. The same goes with human drugs,
so we're still expecting our category, the mail
order category, to get 15% to 20% of the market in
the next three to five years.
D. Santa Thank you.
M. Akdag You're welcome.
Coordinator At this time, I show no further questions, and I'd
like to turn the conference back over to Mr. Akdag.
M. Akdag Thank you. We would like to close with giving you a
brief big-picture idea on long-term prospects of the
company. We're a leader in a new category, an
estimated $3 billion industry, offering the
consumers savings and convenience on pet medication.
There is a strong demand from pet owners for our
channel of distribution. This may accelerate with
consumers becoming more comfortable shopping on the
Internet.
We have a powerful brand name, 1-800-PetMeds. We
have shown a dramatic growth model. We have an
experienced management team in place, and we have
the infrastructure in place to continue to grow the
business. We are very pleased with the results so
far, and we are excited about the future prospects
of the company.
Thank you for joining us.
Coordinator Thank you for participating in today's conference
call, and have a nice day.
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